With the government already committing to spend $194 Billion on measures to fight the economic impact of the coronavirus, the former Reserve Bank of Australia governor Bernie Fraser said Australia faced a “reckoning" to deal with an explosion in budget deficits and public sector debt that could reach $1.5 trillion. Though Economists say the forecast for the government's plan to be net-debt free by 2030 is now highly unlikely, the government this morning stood by its future tax cut plans.
Fraser said there would be a "reckoning" for a swathe of government policies - including tax cuts - as the economy comes to grips with "an awful overhang of debt". No doubt Things like franking credits and negative gearing will once again come under a microscope.
The governments support packages were the equivalent of the entire annual defence, education and health budgets combined and some MP’s were MPs resigned to dealing with an "inter-generational debt" transfer lasting decades.
Pointing to company tax cuts for firms earning under $50 million are due to start next financial year, and personal income tax cuts worth $132 billion over a decade begin in 2022-23, Fraser was quoted in the SMH saying "The packages that have been put together in recent times are very expensive…there is going to be an awful overhang of debt and at some point there is going to have to be a bit of reckoning with that and some winding back."
The Government has lifted the Debt ceiling to $850 billion, up from $600 billion, and while current Debt stands at a record $579 billion, extra spending on support measures this year is already $60.8 billion and is expected to exceed $126 billion in 2020-21.
Government Minister Simon Birmingham however told the ABC this morning that“We want to make these measures temporary to get spending under control and continue with our plans to lower taxes in the future, because lower tax [will] also be a crucial part of the economic recovery for Australians and Australian businesses.We absolutely stand by the tax cuts we legislated for the future.”
Earlier in the week, CBA CEO Matt Comyn predicted a 10% contraction in the March quarter, while an analyst for UBS, George Tharenou, has forecast the economy to contract by 10 per cent in the June quarter. He also pointed out that for every percentage point fall in GDP, $5 billion is moved out of the budget. The economic contraction and the extra spending already being undertaken would turn this year's forecast $5 billion surplus into a deficit of at least $60 billion while next year's forecast surplus of $6.1 billion would become a deficit of at least $150 billion. This and next year’s budget deficits were likely to be in the order of $200-250 billion, while total debt among federal, state and local governments is likely to go from its current level of $1 trillion, up to $1.5 trillion by the end of 2021.