Overview

This is the fifth edition of the Parliamentary Budget Office’s annual medium-term fiscal projections report. It shows the profound impact that the COVID-19 pandemic will have on Australia’s fiscal position.

The 2020-21 Commonwealth Budget forecast an underlying cash deficit of $214 billion in 2020-21. At 11 per cent of GDP this is around 2.5 times greater than the previous worst deficit of the last fifty years.

The financial position is projected to improve over the medium term as a result of the anticipated economic recovery and the winding back of the COVID-19 related policy response.

In this report, the PBO projects the fiscal position will improve over the medium term to an underlying cash deficit of $51 billion, or 1.6 per cent of GDP, in 2030-31.

The COVID-19 pandemic will have an enduring effect on public finances…

Net debt is forecast to increase from 19 per cent of GDP in 2018-19 to 44 per cent of GDP in 2023-24. The PBO projects that net debt will then stabilise and slowly fall to around 41 per cent of GDP by 2030-31. In last year’s report, net debt was projected to be close to zero by the end of the decade.

Gross debt as a share of GDP is expected to reach its highest level since the Second World War, but public debt interest payments are projected to remain lower than for most of the last 75 years (at around 0.9 per cent of GDP) due to historically low interest rates.

…while higher government payments will unwind, lower receipts are projected to continue over the medium term…

Total payments are forecast in the budget to increase from 24.5 per cent of GDP in 2018-19 to 34.8 per cent of GDP in 2020-21, at the height of pandemic related measures, and are projected to then fall back to 26.1 per cent of GDP by 2030-31, 1.6 percentage points higher than 2018-19. While payments are significantly higher in the short term due to the COVID-19 related policy response, this impact is projected to be largely unwound by the end of the forward estimates and medium term.

Total receipts are projected to reach 24.5 per cent of GDP by 2030-31 (0.4 percentage points below receipts in 2018-19, prior to COVID-19). In dollar terms, the impact on receipts is long-lasting due to the close link between economic activity and tax collections.

The trends in payments and receipts can be obscured when looking solely at projected receipts and payments as a percentage of GDP, as the level of nominal GDP is permanently lower as a result of this pandemic-induced economic shock.

… and considerable risks remain to the fiscal outlook.

The near future remains highly uncertain, depending on both the health and economic situation.

A slower-than-expected economic recovery or greater government spending associated with additional COVID-19 outbreaks or fiscal stimulus would flow through to slower improvements in receipts and to higher payments. This would result in higher deficits and government debt.

By contrast, if the Australian economy performs strongly, avoiding a prolonged period of weak productivity growth or negligible price growth, then both the budget balance and debt position could improve faster than projected here.

Download the full report above.