Upbeat economic projections made by Treasurer Josh Frydenberg in Tuesday’s federal budget, including for growth and unemployment, are at odds with those made by some of the nation’s leading forecasters.
An analysis of the budget by National Australia Bank described some of the government’s economic assumptions as “somewhat courageous” considering the sharp decline in government spending next financial year after generous income support programs are withdrawn.
“We found the entire forecasting framework a bit optimistic,” said NAB chief economist, Alan Oster.
Westpac is also less upbeat than the government saying,f in a post-budget review, that its own economic forecasts give “greater prominence to potential headwinds” and that “risks to the economic and fiscal forecasts abound.”
Tuesday’s budget predicted real gross domestic product to bounce back strongly after this year’s sharp contraction caused by the disruptions of COVID-19. It forecasts a strong growth rate of 4.75 per cent next financial year.
But Westpac warns that “fragilities in the economy pre-COVID” including very weak wages growth and legacies from the COVID recession could see that budget forecast “fall short.” Westpac expects growth to be a more subdued 2.9 per cent in 2020-21.
NAB anticipates both a bigger economic contraction than the budget forecast this financial year and a less pronounced improvement next financial year.
“Fundamentally, we are much more worried about the outlook than the forecasts published by the Treasury,” NAB’s budget analysis said.
The budget warned there was a “high degree of uncertainty around the outlook” because of the unpredictable ways the pandemic had affected economic activity. A key source of doubt is the timing and efficacy of any COVID-19 vaccines and other medical treatments. The budget papers assume that a COVID-19 vaccination program will be in place by late 2021, although that may prove to be best-case scenario.
The budget predicts a relatively rapid improvement in employment compared with previous recessions. It forecasts the unemployment rate to peak at 8 per cent in late 2020 before falling to 6.5 per cent next financial year and to 5.5 per cent in 2023-2024.
But Nicki Hutley, a partner at the forecaster Deloitte Access Economics, said she was very sceptical of that scenario.
“I’m prepared to say that I’ll eat a hat if we get to 5.5 per cent unemployment in the timeframe they have put,” she said. “I’d love to be wrong, but given other things that are going on and how sluggish the economy was before the pandemic…that’s all a bit rosy.”
Both NAB and Westpac also expect the unemployment rate to fall more slowly than the budget forecasts.
The budget predicts federal deficits totaling $480 billion over the next four years and for federal debt to reach an unprecedented $1.14 trillion.
If the forecasts made in the budget prove to be overly optimistic government expenditure will be even higher than expected putting further strain on federal finances.
“That means the fiscal path back will take longer,” said Mr Oster.
Budget forecasts for household consumption, which fell by 2.6 per cent last financial year, were also questioned by experts. It is expected to contact by 1.5 per cent in 2020-21 but then to rise by 7 per cent the following year.
Although, on some forecasts economists said the budget may have been overly cautious. A budget review by the Commonwealth Bank said the outlook for iron ore and coking coal prices over the next two years were “too conservative.”
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Source: Thanks smh.com