Australia’s economy is on course to be $106 billion larger than federal budget forecasts by 2024, according to new modelling from Deloitte Access Economics.
As Josh Frydenberg prepares to hand down his Mid-Year Economic and Fiscal Outlook (MYEFO), Deloitte’s economists said low COVID-19 case numbers, a strong economic bounce back, and unexpected windfalls from the China trade war had brightened the budget’s original “conservative” outlook.
However, the government’s choice to bank on tax breaks for workers and businesses, instead of prolonging JobKeeper, would only pay off if outbreaks remain contained until a vaccine rollout, their report suggests.
Deloitte Access Economics partner Chris Richardson said the economy’s surprising performance – confirmed by recent national accounts figures – means the country is on track to record $33 billion in added GDP (compared to official budget forecasts) this financial year.
That figure was helped by Australia’s grasp on the virus, unemployment hovering below Treasury’s year-end forecast of 8 per cent, and fast-declining numbers of JobKeeper recipients, he said.
The latter would contribute to overall government spending being revised down in the MYEFO, while higher-than-expected numbers in the workforce would contribute to a greater tax yield.
The improved outlook is also in spite of extra spending announced since October, including $1 billion for local vaccine production and $3.4 billion for extended HomeBuilder grants and JobSeeker supplements.
When comparing the four-year outlook, the projected GDP gap widens to $106 billion by 2023-24.
“Treasury was forecasting an Australian economy that would permanently be around 5 per cent smaller than its pre-COVID forecasts, and yet policy was shifting away from income supports such as JobKeeper towards tax-driven incentives for families and businesses,” Mr Richardson said.
“A bunch of things needed to go right for that policy mix to work best – yet the good news is that’s exactly what has happened since then.”
Deloitte’s findings come two weeks after the OECD warned Australia not to withdraw vital fiscal support until the recovery from the economic headwinds of the pandemic were “well entrenched”.
Despite forecasting growth in 2021 and 2022, the OECD also suggested unemployment will rise further due to the gradual phasing out of JobKeeper.
China trade conflict has unintended tax ‘windfall’
Mr Richardson noted the MYEFO bottom line would be aided by global anxiety surrounding the Australia-China trade war, with markets reacting to concerns Beijing may impose sanctions on local iron ore suppliers.
Although that scenario is unlikely – as China buys roughly two-thirds of its yearly supply from Australia – markets have consistently bid up the price of iron ore in anticipation of potential tariffs.
And Mr Richardson said this ‘fear tax’, which has seen iron ore prices rise $US18 ($25.32) since November 30, will lead to a more substantial intake by the Australian Tax Office.
“The bottom line is that China’s trade war with Australia is making us money rather than losing it,” Mr Richardson said.
“To be clear, we’ve lost money on everything from lobsters to wine. But we’ve more than made that up in overall terms thanks to iron ore – and the taxman will be a considerable beneficiary of that.”