Date posted: 23/07/2020

COVID-19 cost has been huge but don’t expect reforms

The clear message is that things could have been a lot worse without government intervention, but this has come at a huge cost through both increased expenditure and reduced revenue.

Australia is expected to have A$851.9 billion of gross debt in 2020/21 – which equates to 45% of GDP. Real GDP is forecast to fall by 7% in the June 2020 quarter and unemployment is expected to peak at 9.25% in the December 2020 quarter. 

That's the bad news from the government’s economic and fiscal update. 

But Australia's economy is holding up comparatively well vis-à-vis other nations and the Treasurer, Josh Frydenberg, can see light at the end of the tunnel. The situation is "manageable" he says.

That's the good news, but so much depends on disturbing COVID-19 events unfolding in Victoria and New South Wales.

The government has defended its COVID-19 spending, noting that its initiatives have: "increased the level of real GDP by around 0.75% in 2019-20 and will increase it by around 4.25% cent in 2020-21 relative to no policy support. Fiscal measures are also estimated to have lowered the peak of the measured unemployment rate by around 5 per centage points, preventing the loss of around 700,00 jobs." 

The Treasurer's clear message is that things could have been a lot worse had the government not responded the way it did.

But COVID-19 has savagely impacted government finances through both increased expenditure and reduced revenue.

More than A$187 billion has been, or will be, spent on COVID measures. 

JobKeeper is the most significant COVID expenditure at an estimated cost of A$85 billion , followed by CashBoost at A$32 billion and individual-household assistance (read Centrelink) at A$26.8 billion. 

The numbers presented by the Government are optimistic about the future. Critics will say overly-optimistic.

There is an assumption that the economy will start recovering in September 2020 and that the recovery will be substantially quicker than that experienced with previous recessions.

It is now expected that JobKeeper will cease on 28 March 2021, so demand for JobSeeker will sadly increase.

Government tax revenue has been hit hard by COVID.  Estimates provided for 2019/20 and 2020/20 show the following impact.

 

2019/20
$

2020/21
$

Personal tax

(9.2bn)

(26.9bn)

Company tax

(13.2bn)

(12.1bn)

GST

(5.2bn)

(7.6bn)

Customs

(2.1bn)

(3.1bn)

TOTAL

(31.7bn)

(58.9bn)

So what is the government expecting?

Exponents of new monetary theory believe that this large budget deficit is nothing to worry about as growth in the economy (as measured by GDP) is likely to exceed inflation (which is broadly the cost of the government debt). 

But clearly, government expenditure will be doing the heavy lifting.

With depressed business and personal spending, expect an even bigger deficit figure to come out on Federal Budget night, 6 October 2020.

Reform anyone?

It's not likely at this stage, even though it's almost universally acknowledged that Australia's entire tax, welfare and retirement landscape needs rethinking. Indecision and timidity have plagued our country for decades and nobody seems to think we've reached a 'burning bridge moment' just yet.

The post-COVID-19 road to recovery requires a tax system that supports, not hinders economic growth. But the current thinking in Canberra is that this support is unlikely to take the form of tax incentives (given the state of the budget), but rather the elimination of 'distortions' created by tax concessions. 

Today the Treasurer played his cards close to his chest about the prospect of such major changes in the October Budget, perhaps because he is pinning his hopes on the work of Federal, State and Territory Treasurers tasked with working up options on tax and deregulation.

There is, after all, safety in numbers.

Australians will want to know what plan they've come up with.

[1] The numbers do not add but they are extracted from official government sources.

Treasurer's Economic Statement

Treasury’s update on the economic and fiscal outlook.

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CA ANZ media release

Accountants on the economic update: “We need to work through the tears”

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