The likely resumption of Australia’s economic recovery should see a marked improvement in coming federal budgets, but politicians from both sides of the aisle have been warned of a looming black hole.
Deloitte Access Economics is predicting a $45 billion improvement in the budget bottom line over the next four years as the economy rebounds from the recent COVID-19 lockdowns.
“We’ve said for some time that, if you can repair the economy, you can repair the budget,” Deloitte partner Chris Richardson told AAP.
“Australia’s great effort on vaccinations will deliver a recovery that is more reliable.”
In the near term, the latest Deloitte Access Economics budget monitor expects the 2021-22 deficit will see a $9 billion deterioration to $116 billion compared to what Treasury had forecast in the May budget as a result of the impact of the Delta variant.
Mr Richardson said the costs of dealing with Delta were a very small fraction of the dollars that were racked up when pandemic hit last year, in part because the Morrison government pushed more of the costs on to the states.
But from then on, there should be a steady improvement in the deficit position, starting off with a shortfall of $74 billion in 2022-23, $25 billion smaller than predicted in May.
Mr Richardson also sees a $20 billion improvement for 2023-24 at a deficit of $59 billion and a $8 billion reduction to $49 billion for 2024-25.
“Yet, although there’s good news coming in the budget over the next few years, that’s set to become bad news over time,” he said.
He said governments have underspent on social services for some time, such as on aged care, disability and mental health, while defence spending is also accelerating.
At the same time, COVID-19 international border closures means by mid-2025 the Australian population will be almost a million people smaller than had previously been expected, which will come at a cost to revenues.
Against this backdrop, sizeable income tax cuts are being thrown into the mix.
“So just when we should be tuning out minds to how to pay for higher social services and on defence, we’ll deliver a tax cut that’s too big,” Mr Richardson said.
“The upshot is that there’s a $60 billion hole in our budgetary bucket.”
He said raising $60 billion a year is the equivalent of lifting the GST to 17 per cent from 10 per cent without giving the states a cent, or lifting the company tax rate for big firms from 30 per cent to 50 per cent – not that he is advocating for either.
“But there’s a federal election looming and we shouldn’t let either side go through that campaign pretending there aren’t difficult decisions to make down the track,” he said.