Australia unveils years of budget deficits to sustain recovery

Australia's government pledged billions in spending on Tuesday to sustain an economic recovery from the COVID-19 slump that has blitzed even the most optimistic projections, a move that will keep public finances in the red for years to come.

While Prime Minister Scott Morrison's conservative administration has abandoned any pre-pandemic commitments to a budget surplus, a significant boost in tax receipts from mining exports has helped trim the projected deficit for the current fiscal year.

Treasurer Josh Frydenberg said the budget shortfall will hit A$161 billion in the year ending June 30, a record but much lower than the government's October forecast of A$213.7 billion, thanks to a significantly improved economic outlook.

"Australia's economic engine is roaring back to life," Frydenberg said in prepared remarks to parliament. "Since the last budget, almost half a million jobs have been created."

Australia's A$2 trillion economy slipped into a COVID-induced recession last year but timely and generous monetary and fiscal support coupled with the country's success in curbing the coronavirus pandemic have boosted its fiscal outlook.

The Reserve Bank of Australia (RBA) has slashed interest rates to a record low 0.1% and has vowed to not tighten policy until it meets in employment and inflation goals.

The government now projects unemployment will fall below 5% in 2022-23. It slipped to 5.6% in April from a 22-year high of 7.5% last July when coronavirus lockdowns shut down shopping malls and airlines, triggering a surge in demand for social welfare.

Expectations for economic growth were upgraded to 4.25% for 2021-22 from a 3.5% forecast in October.

The deficit is seen narrowing to around A$106.6 billion in 2021-22 from A$112 billion estimated in the October budget.

A shortfall is expected to persist throughout the four-year forward estimate period, with deficits as a percentage of gross domestic product shrinking to 2.4% in 2024-25 from 7.8% in 2020-21.

That would blow gross public debt out to more than A$1 trillion by 2022-23 from A$829 billion in the current year.

RISKS

This year's budget could be Frydenberg's last before a general election, due by mid-2022 and the government has faced growing anger following a number of scandals that put the spotlight on treatment on women in the workplace.

Included in the new spending commitments is a A$3.4 billion Women's Economic Security Package, which lifts childcare subsidies, boosts funding for safety and focuses on getting women back into the workforce.

The government has also pledged A$15.2 billion in infrastructure for rail and road projects, including a major logistics hub in Melbourne.

Clouding the outlook, Australia's international borders are not expected to fully reopen until the middle or second half of 2022.

The freeze on new arrivals is not only a blow to airlines and tourism, but also property development and universities, which normally attract hundreds of thousands of international students.

Doubts about when Australia can reopen to the rest of the world have been compounded by the relatively slow rollout of COVID-19 vaccinations.

Only about 2.7 million doses have been deployed since the programme started in February, well short of the 4 million pledged by the end of March.

Worsening diplomatic relations with China, Australia's largest trading partner, have also created headaches for exporters with import curbs hitting wine and seafood producers particularly hard.

For now, however, Australia's iron ore shipments to China remain unscathed and are helped by a surge in prices, while other mining commodities such as coal have found new markets, lifting government projections for revenue for the current fiscal year.

The government said in its budget paper the restrictions have had "limited impacts on Australia’s overall economic recovery."