Australia has reported its largest budget deficit since the second world war after it was forced to introduce emergency measures to keep workers employed and prevent an economic collapse from Covid-19.
A A$95bn ($68bn) fall in tax receipts in the 2020 and 2021 financial years and A$164bn in additional public spending has turned a forecast budget surplus into deficits of 4.3 per cent of gross domestic product in the year to end June 2020 and 9.7 per cent this financial year, which ends June 30 2021.
However, a government wage support scheme and targeted help for businesses have cushioned the pandemic’s impact on the economy, which is forecast to contract by 0.25 per cent in 2019-2020 and 2.5 per cent in 2020-21.
“Australia is experiencing a health and economic crisis like nothing we have seen in the last 100 years,” said Josh Frydenberg, Australia’s treasurer, during a budget update on Thursday.
“Our economy has taken a big hit and there are many challenges we confront . . . we must remain strong.”
Richard Yetsenga, chief economist at ANZ bank, said the budget deficit was the largest since the end of the second world war, when it peaked at 27 per cent of GDP.
But Mr Frydenberg said Australia was performing better than most other developed nations owing to its strong handling of the health and economic effects of Covid-19. He noted that the US economy was forecast to contract by 8 per cent in 2020.
Most Australian states have relaxed social distancing measures after their success in suppressing the virus. But Mr Frydenberg acknowledged the dangers posed by an outbreak of the virus in the state of Victoria, which has reported a record 887 cases over the past two days.
He said a new six-week lockdown in Melbourne, Australia’s second most populous city, would cost the economy about A$3.3bn.
Authorities in Victoria have pinpointed workers without job security and a lack of sick leave as important reasons for why nine out of 10 residents had not self-isolated when they developed Covid-19 symptoms. Many continued to go to work.
On Thursday the state government announced it would provide a A$300 hardship payment to anybody who had taken a Covid-19 test and needed to remain off work to isolate while awaiting the results.
The spread of Covid-19 to Australia in late February and strict social distancing rules had an immediate effect on the jobs market with the loss of 870,000 jobs between March and the end of May. Unemployment is forecast to peak at 9.25 per cent in December, up from 7.4 per cent in June.
Mr Frydenberg said government support schemes had saved 700,000 jobs and ensured unemployment did not peak at five percentage points higher than that rate.
Mr Yetsenga said the extraordinary fiscal response from the government had prevented the economic fallout from being even worse.
“The budget’s natural stabilisers, through unemployment support for instance, have played a role. But most important has been the discretionary policy efforts which are the largest in history,” he said.
Surging demand for resources in China is helping to support the Australian economy. Mining investment is forecast to be positive for the first time in seven years, growing by 4 per cent in 2019-20 and 9.5 per cent in 2020-21, according to the budget update.
This compares with falls in overall business investment of 6 per cent and 12.5 per cent over the same period.