Treasurer Josh Frydenberg has talked up Australia’s economic outlook in his mid-year economic update but the spectre of COVID-19 continues to hang over the predictions.
Treasury’s mid-year economic and fiscal outlook suggests the economy is rebounding strongly from the impact of lockdowns from the Delta variant.
Lower unemployment and higher wages are being spruiked by the government, but there is also increasing inflation to match it.
The outlook warns the pandemic continues to pose headwinds for the global and domestic outlook, amid the potential emergence of new COVID-19 variants.
What is the outlook?
The federal treasurer's update revealed a modest $7 billion improvement on the deficit with this now trimmed back to $99.2 billion this financial year.
Meanwhile, net debt is forecast almost a trillion dollars by 2025 with no immediate sign of the federal government clawing itself out of the red.
But there’s better news for people trying to find a job with the unemployment rate expected to fall to 4.5 per cent this year and 4.25 per cent 12 months after that.
According to Treasury, people in work should also be expecting a pay rise with wages growth supposed to take off from 2.25 per cent in 2021-22 to 3.25 per cent in 2024-25.
But the short term reality is that an expected increase in inflation is expected to eat into these gains.
Economist Stephen Koukoulas said the good news is the economic forecast showed signs of a "pretty solid recovery" coming through.
But he added that he was "disappointed" there had been no material efforts towards budget repair outlined in the update.
"In my mind, it is a bit of a lost opportunity to start what will be a long process of repairing the budget,” he said.
"A trillion dollars of government debt is a very big number and we’ve got to start somewhere to contain that - let alone start to reduce it."
COVID uncertainty?
The budget update outlines that underlying resilience in the economy is expected to continue even as new COVID-19 variants emerge.
This includes assuming that lockdowns are no longer required to manage COVID-19 transmission in the country.
While the potential for new COVID variants do pose a threat - the Omicron variant is not assumed to "significantly alter current reopening plans".
"The expectation is that we're not going to see Omicron derail the recovery," Mr Frydenberg told reporters.
This has been aided by Australia’s high vaccination rate, which is assisting to manage the health challenges and support confidence among households and businesses.
Treasury's modelling does accept that a "temporary strengthening of activity restrictions" may be required to respond to rising case numbers or contain a "localised outbreak" in areas of lower vaccination coverage.
Treasury's forecast also accepts that a new variant of concern, requiring a “more significant public health response”, could alter reopening plans.
If a variant occurred under this scenario, the international border could be set back by six months.
Targeted activity restrictions - such as physical distancing and density limits - could also be put in place.
$16bn of mystery election spending
The weighty financial update also had some missing details.
This includes $16 billion in measures that the government has settled already but is refusing to make public.
“They are measures that we expect to eventuate, but at this point, we can't allocate and confirm to specific programs,” Mr Frydenberg said.
But Labor treasury spokesman Jim Chalmers has accused the government of stashing money away ahead of the federal election next year.
"Billions of dollars of your money, stashed away to be spent on the prime minister's political interests and not on the national economic interests," he said.
Migration
After the migration levels sunk into negative territory in the pandemic, the budget update is now mapping a path back.
Next year it's expected 180,000 people will migrate to Australia and within two years the annual increase is forecast to rise to 235,000.
Economist Gabriela D’Souza said the forecast is a sign the migration system is stabilising after being rocked by the international travel ban.
“These all add to a picture in my view of there being an increased trust and confidence that we are going to return to some kind of pre-COVID normalcy,” she said.
The National Disability Insurance Scheme
The budget’s deficit estimate has been in part tempered by the cost of funding the National Disability Insurance Scheme and COVID-19 lockdowns.
The cost of the NDIS is expected to reach $26.4 billion over four years to $26.4 billion in 2024-25.
This comes off the back of higher average participant costs and numbers of people accessing the scheme.
The AUKUS deal
The budget update also makes no mention of the full budget impact of breaking the multi-billion dollar deal on French submarines.
However, it does describe the decision to ditch the contract in favour of a nuclear-powered submarines as a "fiscal risk".
The 2021/22 mid-year economic and fiscal outlook papers said the decision to get rid of the $90 billion French contract could impact the budget bottom line.
