Mr Frydenberg also forecast a gradual lift in economic growth but the coronavirus outbreak is now expected to result in the economy shrinking through the March quarter. The stimulus package will focus most of its spending into the June quarter in a bid to avoid a recession or back-to-back negative quarters of growth.
The stimulus package unveiled by Prime Minister Scott Morrison and Mr Frydenberg on Thursday includes $11 billion in costs for the current financial year. The biggest single expenditure is the $5.9 billion impost from helping businesses cover the cost of employees wages.
Another $4.8 billion will be spent on the one-off $750 payments to welfare recipients, including people on Family Tax Benefits.
The stimulus is on top of the government’s extra expenditure for health programs. This week it announced $2.4 billion worth of projects to deal with the virus, with much of the cost to hit the budget before the end of the financial year.
Five hundred million dollars has been set aside to deal with the government’s response to the summer’s fires in the 2019-20 financial year. Another $1.5 billion will hit the budget over coming years.
Mr Morrison would not be drawn on the immediate size of the deficit now facing the government.
He said the package had been structured to ensure it did not hurt the budget in the longer term.
“(What) we need to look carefully at over the next few years is how the broader global impacts will impact on the Australian economy out over the next three or four years,” he said.
“The way we’ve designed this stimulus is to ensure that it doesn’t have a fiscal hangover down the track, that it doesn’t bury the budget for a decade.”
Analysts believe the budget is now facing a deficit of at least $14 billion, a $21 billion deterioration from what was promised in April.
Next year’s forecast surplus of $6.1 billion is also likely to have disappeared with the stimulus package containing $6.6 billion in extra spending for the 2020-21 financial year.
Beyond that, the package actually lifts budget revenues by $1.6 billion in 2022-23 and $3.7 billion in 2023-24 due to the way the instant asset write-off and accelerated depreciation deductions for business interact with the tax system.
Most economists believe the spending in the June quarter will prevent a recession, but UBS senior analyst George Tharenou said despite the stimulus package the economy would contract and unemployment increase.
“With the very significant disruption to labour markets, we see employment growth flat-lining in coming quarters, seeing the unemployment rate increase significantly to 6.25 per cent by the end of the year,” he said.
Commonwealth Bank senior economist Gareth Aird said there was no getting away from the financial hit to the budget from the stimulus package.
“The stimulus alone in the June quarter will be a direct cost the budget of $10.9 billion in 2019-20, meaning the budget is back in the red and borrowing will lift,” he said.
“But that is ok. It is a short term budgetary cost to support the economy through a difficult period.”
The deficit instead of a surplus means government debt, already at a record $573.1 billion, will grow.
The government’s debt agency, the Australian Office of Financial Management, said it would issue between $1.2 billion and $1.6 billion in debt for “most coming weeks” to the end of the financial year. This would amount to between $17 billion and $22 billion in extra debt.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.