The May budget was cancelled, so we’ve had to wait for revised forecasts mapping the impact of Covid-19 on the budget and the economy. The Treasury produced new numbers on Thursday. What did we learn?
At a glance
Let’s start with the outlook for jobs. Almost a million Australians are jobless now, with the unemployment rate at 7.4%. It’s going to get worse. The Treasury says unemployment will be over 9% by Christmas, and it will take time to trend back down. The jobless rate is expected to gradually decline from the start of 2021 to hit 8.75% in the June quarter of 2021. Long-term unemployment is a constant of recessions, and the Treasury believes this downturn will be no different. It notes in the recession of the early 1990s, it took around seven years for the unemployment rate to fall from its peak of 11.2% in 1992 to below 7%.
The news doesn’t get any better I’m afraid. Economic growth is going backwards. GDP will contract by 0.25% in 2019-20 and 2.5% in 2020-21. In one of those strange quirks of fate, the Coalition that used to screech apocalyptically about “debt and deficit disasters” and “budget emergencies” is the same Coalition that will deliver a deficit of $85.8bn in 2019-20 and $184.5bn in 2020-21. Gross debt will also hit a new record ($851.9bn by June 2021). Taxes are down, and the Treasury doesn’t know when revenue collections will improve. Expenditure is up, reflecting the crisis conditions. To cut a long story short, the economy was sputtering before the pandemic hit, and Covid-19 has delivered a body blow. Australia will endure its largest annual fall in economic history during 2020 – a year most of us want cancelled.
Can we believe these numbers?
The new forecasts are more accurate than astrology, but they need to be read with a high degree of caution. What ultimately happens over the next weeks, months, and likely years depends on the trajectory of a virus that writes its own rules. But rather than just make that blindingly obvious observation and move on, let’s drill deeper by looking at the assumptions sitting behind these numbers.
What does the Treasury assume?
Let’s just say these folks are glass half-full. Officials have crafted Thursday’s forecasts assuming that lockdowns and public health restrictions will be lifted progressively between now and September everywhere in the country apart from Victoria. The Treasury also assumes the lockdown in Victoria will be lifted after six weeks and the border with New South Wales will reopen in late August. It assumes localised outbreaks elsewhere will be contained. (On current information, this feels optimistic.)
The Treasury assumes international travel remains low until the end of the June quarter next year. (Entirely safe, given current restrictions.) Migration is a big contributor to economic growth in Australia, and the news on that front is sobering. Net overseas migration is assumed to fall from 232,000 in 2018-19 to be 154,000 in 2019-20 and (wait for it) 31,000 in 2020-21. (Logical, but a worry.) The Treasury thinks the international border reopens in the first six months of next year, with any visitors to be quarantined for two weeks on arrival. (Possibly that’s right, but on current trajectories and in the absence of a vaccine, who can say?) The net effect of the border reopening is people and their economic activity return, but not at pre-pandemic levels.
What if the opposite is also true?
Another way of asking the question “can we believe these forecasts?” is to ask ourselves whether the Treasury believes its own numbers. The answer to that question is yes, but only up to a point. If the Treasury was at the Oscars, you’d give the department best performance with an abacus in a merde storm. You wouldn’t give them best factual, or documentary. The number-crunching obviously reflects best endeavours in a highly unpredictable environment, and it’s presented as such. The Treasury both poses and attempts to answer the obvious “what if everything goes to custard” question with some back-of-the-envelope calculations. The Treasury says when the strict restrictions were first imposed in late March, GDP was around $4bn a week lower than in pre-pandemic times. It thinks when the restrictions eventually come off, economic activity might jump by $2bn a week within a few months – about half of the original fall. But if we go in the other direction – if we have to go back to lockdowns of non-essential services – we would return to where we were in April and May, with costs to the economy in the order of $2bn a week. So this is as close as the Treasury gets to telling people: look, we’ve done our best, but don’t bet your house on our calculations.