Life in wartime: Frydenberg unveils COVID’s economic damage — and a double-dip recession?

The pandemic and the government’s response has sent the budget into deficit to an extent not seen since wartime and crunched key economic indicators for the next two years — with a double dip recession to be created by the withdrawal of Jobkeeper assistance.

Treasurer Josh Frydenberg and Finance Minister Mathias Cormann unveiled the long-awaited budget update this morning, showing that the mooted 2019-20 budget surplus had turned into an $85.8 billion deficit, while this year — originally forecast for an $11 billion surplus, will see a colossal $184.5 billion deficit, or just under 10% of GDP.

That will send Australia’s net debt to over 35% of GDP — a figure likely to get worse before it gets any better.

Economic growth will also be severely curtailed, with negative growth for longer than initially expected. Growth in 2019-20, with two quarters of negative growth in the March and June quarters, will be -0.25%, with the government expecting a June quarter contraction of -7%. While economic activity is expected to lift 1.5% in the September quarter, growth will still be negative overall over 2021, at -2.5%.

That appears to mean a double dip recession, with growth returning to negative in the December and March quarters — when the government is cutting back significantly on its JobKeeper and JobSeeker programs designed to support incomes.

The government expects a big rise in growth in the first two quarters of the 2021-22 financial year, to lift overall growth in calendar 2021 into positive territory.

Unemployment will surge to nearly 9% nationally in coming quarters, and that will smash wages growth, with growth having fallen from the stagnant level of the March quarter — 2.2% — to 1.75% overall for 2019-20 and then 1.25% this year — the same as the inflation rate, meaning no real wage growth.

Business investment is expected to collapse by more than 10% this year, along with a huge fall in housing investment. the lack of world economic growth will also harm our terms of trade, which will fall by over 10% as well.

Disappointingly, the government has only provided forecasts for 2020-21, instead of the usual budget practice of this year and three years beyond. Like many fiscal practices these days, one can only imagine the cries of outrage if the Rudd or Gillard governments had declined to offer any forecasts.