The economic growth forecasts have been upgraded with conditions rebounding more quickly than anticipated as the virus was brought under control – at least for now. At the same time, the iron ore price is defying gravity.
The profile for output growth, which brings forward the timing of the reopening effect, is now: 2020/21, +0.75% (upgraded from -1.5%); 2021/22, 3.5% (moderated from 4.75%); 2022/23, 2.50% (lowered by 0.25%); and 2023/24, 2.75% (also lowered by 0.25%).
Westpac’s forecasts for output growth for this financial year and next are not greatly different from the Government, at 0.3% for 2020/21 (vs the 0.75%) and 4.1% for 2021/22 (vs the 3.5%).
The size of the economy in 2020/21 is now expected to be almost 3% larger than expected in the October 6 Budget – as we foreshadowed in our MYEFO preview.
The nominal GDP growth profile across the four years is now: 1.0%; 1.25%; 3.75%; and 4.75%.
The nominal GDP growth view for 2021/22 is almost certainly too pessimistic, incorporating the “assumption” that the iron ore price will glide back to US$55/t fob by the end of the September quarter 2021 (that has been pushed back by one quarter from that assumed at Budget time).
Currently, the iron ore spot price is around $150/t and we anticipate that it will be around $120/t in September 2021.
By way of context, the October 6 Budget papers indicate that a US$10/t fob increase in the iron ore price would lift nominal GDP by $4.4bn in the current year and by $3.4bn the following year, leading to a lift in tax receipts for the two years of $0.3bn and $0.5bn, respectively.
The unemployment rate is now forecast to peak at 7.5% in the March quarter 2021, lowered from the previously anticipated peak of 8%. Currently, the unemployment rate is 6.8% for November, as announced by the ABS today (after the MYEFO document was finalised).
In terms of the end of financial year forecasts, the unemployment rate is expected to be at 7.25% in mid-2021, unchanged from the October forecast. Thereafter, the profile has been lowered by 0.25% for each year, to be: 6.25%; 5.75%; and then 5.25% by mid-2024.
We see downside risks to this unemployment rate profile, anticipating that the rate will be at 6.5% in mid-2021, rather than the 7.25% assumed by the Government.
Budget deficit revisions – details
The budget deficit profile has been lowered to reflect the upgraded economic outlook. New spending measures are modest.
The deficit forecast for 2020/21 has improved by almost $16bn, to be $197.7bn. As a share of the economy the 2020/12 deficit is now expected to be 9.9% of GDP, an improvement from the 11.0% expected in October.
Over the four years, the cumulative deficit is now expected to be $456.6bn, a $23.9bn improvement on October.
For the 2023/24 year, the deficit is a forecast $66.0bn, 3.0% of GDP, little changed from the October forecast of $66.9bn.
The upgraded economic outlook adds $20.8bn to the budget in 2020/21, with a partial offset of $4.9bn to fund new policy – giving the net improvement of $15.9bn.
Over the four years, the economic boost is $36bn and the cost of new policy is $12.1bn – for a net improvement of $23.9bn.
Net debt at the end of the forecast period, mid-2024 is now expected to be $951.7bn, 43.0% of GDP. That is down from $966.2bn, 43.8% of GDP, expected in October, an improvement of $14.5bn.
The quicker rebound in the economy and the higher iron ore price, which is assumed to be only temporary, boosts total revenue by $9.5bn in 2020/21, moderating to $7.0bn in 2021/22, and then $5.1bn in 2022/23 and only $0.5bn in 2023/24 – a cumulative impact of $22bn.
Of the $22bn increase in receipts over the forecast period due to the stronger economy, higher company tax receipts contribute an additional $7bn, including a $3.4bn upgrade in the current financial year. In 2020/21 this largely reflects upwards revisions to the forecast for mining profits.
The reduction in expenditures due to the quicker rebound post covid is centred in 2020/21, at $11.3bn, after which there is minimal impact in the following two years. Key here is that the stronger labour market is reducing the cost of the labour market programs – particularly JobKeeper, a reduction of $11.2bn, a program that expires at the end of March 2021.
Policy decisions taken since the October 6 Budget increase payments by $4.8bn this year and by $10.3bn over the four years. The main initiative is to extend the Coronarivus
Supplement until end March 2021, at a cost of $3.2bn. Vaccine funding costs $1.6bn over two years from 2020/21.
Comments and policy outlook
This is a “marking time” economic statement with very limited new policy. As is often the case with MYEFO, the update is largely an opportunity to refresh the economic forecasts and assess the budgetary impacts of any such revisions. On this occasion, the increase in payments of $4.8bn this financial year (including the $3.2bn to extend the Jobseeker supplement of $150 for another three months to the end of the March quarter) is the most significant policy adjustment since the Budget in October.
The real issue now will be the likely policy approach in the next Budget that will be announced in May next year. This will be the likely final Budget before the 2022 Federal election so the government will be focussed on addressing the need to support an economy where it is likely to continue to be forecasting an unemployment rate that will be around 6% (1.5% above the full employment rate) at election time.
As noted, the government is likely to have based its forecasts for the cost of JobKeeper on around 1.5 million workers still needing JobKeeper when the program expires at the end of March 2021. We expect that JobKeeper will need to be replaced by an assistance program that certainly supports those employees and businesses which will still be impacted by travel restrictions; foreign border closures; very limited net migration and social distancing. Arguably a significant proportion of the 1.5 million who will be leaving JobKeeper will continue to be affected. The cost of any such programs, which might entail limited wage subsidies, may well exceed the $11.2bn savings the government has allowed from JobKeeper in MYEFO.
The government is also almost certainly going to have to adopt a more permanent approach to unemployment benefits in the next Budget. This piecemeal “3 month extension” will need to evolve into a permanent increase in the unemployment payment. The current “$150 coronavirus supplement” should be adopted on an average basis even if there are more attractive allowances for urban recipients. Making the $150 “supplement” permanent would add around $12bn per year to the budget bottom line.
If we do see these policies and others aligned with an election year adopted in the May 2021 Budget then the improvement in debt levels which is envisaged in MYEFO will soon be offset.
In MYEFO government securities (AGS) on issue are forecast to increase from $852bn in 2020/21 (revised from $872bn in the October Budget) to $991bn in 2021/22, and then lift to $1,059bn in 2022/23 and $1,138bn in 2023/24.
Even before the additional new issuance associated with the expected policies in the 2021 May Budget there will be adequate securities available to support the expected programs of AGS purchases by the Reserve Bank (some $80bn to May 2021; $70bn to November 2021; $35bn to May 2022; and $35bn to November 2022).
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
