A new tranche of company tax cuts for firms earning under $50 million starts next financial year, while personal income tax cuts worth $132 billion over a decade begin in 2022-23.
“The packages that have been put together in recent times are very expensive,” Mr Fraser said. “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.”
Former prime minister Kevin Rudd said the government had to deliver a budget update by May so decisions about future spending could be debated now.
“That then gives us the real basis for deciding what is needed next, particularly for the long-term repair of the revenue base, which has been the central problem for the Australian budget for a decade,” he said.
Extra spending this financial year on support measures has already reached $60.8 billion, while in 2020-21 it is expected to exceed $126 billion. The government has also lifted its debt ceiling to $850 billion from $600 billion. Debt currently stands at a record $579 billion. The federal budget faces a huge drop-off in expected tax revenues with corporate, personal income and superannuation taxes all expected to be lower than forecast.
Mr Fraser backed the the government’s overall response, saying it had a “distinct air of fairness” and it showed the government viewed the workforce and business as “equal partners in this resurrection”.
UBS analyst George Tharenou, who forecasts the economy to contract by 10 per cent in the June quarter, said every percentage point fall in GDP removes $5 billion out of the budget. A 10 per cent drop in nominal GDP would cost the budget about $50 billion in revenue. That along with the extra spending would turn this year’s forecast $5 billion surplus into a deficit of at least $60 billion. Next year’s forecast surplus of $6.1 billion would become a deficit of at least $150 billion.
Mr Tharenou said budget deficits by all levels of government would be about $200 billion this year, up from a forecast $50 billion. Next year’s deficits could reach $250 billion, the bulk of which would be carried by the federal government.
Total debt among federal, state and local governments is likely to reach $1.5 trillion by the end of 2021. It is currently $1 trillion.
“The size of the increase in the debt stack will be persistent for a very long period of time,” he said.
Overnight, Treasurer Josh Frydenberg used a meeting of G20 finance ministers and central bankers to urge fellow rich nations to start work now on ways to lead the global recovery once the health crisis was over.
“It must coordinate the lifting of travel, transport and production restrictions, and commit to fiscal actions that will stimulate a rebound in business activity and get people back to work,” he said.
KPMG chief economist Brendan Rynne said the government was making a deliberate choice to spend money on behalf of businesses and households to save the economy now.
“While it will take a couple of decades to pay this off, Australia is in a good position because our starting point was strong and the policy measures taken by the government will reduce the economic damage,” he said.
Not only will there be substantially more debt, the interest bill on that debt will climb.
with Rob Harris
Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.