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Australian Deficit Slashed As Treasurer Eyes Recovery

Treasurer Josh Frydenberg is poised to hand down his third budget

SYDNEY — A massive turnaround in the deficit will be unveiled in the Australian federal budget, as the government hails the economic recovery and national effort taken to suppress Covid-19.

Large commitments will be made in aged care, health, and infrastructure, which Treasurer Josh Frydenberg says can be sustained because of a much-improved budget bottom line compared to just a few months ago.

“The 2021 budget will mark the next phase of Australia’s economic recovery plan and our path forward,” he said.

The treasurer tweeted “Budget 2021 is all about the Australian people. It’s about guaranteeing essential services, creating more jobs, and keeping Australians safe from Covid-19.”

People are seen walking in the Melbourne CBD. In March the jobless rate was 5.6 percent at a time when Treasury had previously expected it to be 7.5 percent. (Daniel Pockett/AAP Image)

Economists are expecting a budget deficit of around AU$ 155 billion ($121 billion) for the 2020/21 financial year, smaller than the AU$ 197.7 billion ($155.03 billion) shortfall estimated in December’s mid-year budget review.

Similarly, the deficit for 2021/22 is expected to have shrunk to AU$ 80 billion ($62.73 billion) from AU$ 108.5 billion ($85.1 billion).

“The massive improvement reflects the faster than expected recovery in the economy,” St George economist Matthew Bunny said.

“The labor market has bounced back faster than expected, meaning the government has spent less than predicted on income support payments.

“Plus, commodity prices have surged much higher than expected back in December, boosting tax revenue.”

The iron ore price alone has rocketed to a record high of just over $200 per tonnes (AU$ 255 million) when Treasury had forecast it falling to $55 (AU$70.27) per tonnes.

Marked changes are also expected in Treasury’s economic forecasts.

Treasurer Josh Frydenberg and Minister for Finance Simon Birmingham with the Budget papers at Parliament House in Canberra, May 11, 2021. (Mick Tsikas/AAP Image)

Using the Reserve Bank forecasts as a guide — which were updated in the central bank’s latest quarterly monetary policy statement last Friday — it expects growth to be a speedy five percent in the 2021/22 financial year.

That compares with the Reserve Bank of Australia‘s previous forecast of 3.75 percent and Treasury’s 3.5 percent.

But all eyes will be on Treasury’s unemployment forecasts given Frydenberg has set a target of below five percent before the process of budget repair begins.

In March the jobless rate was 5.6 percent at a time when Treasury had previously expected it to be 7.5 percent.

The Reserve Bank of Australia is predicting an unemployment rate of five percent at the end of this year and 4.75 percent by the middle of 2022.

However, the central bank believes an even lower jobless rate is needed before decent wage rises can be expected — the long-time missing link in Australia’s economic performance, even before the pandemic.

(Edited by Vaibhav Vishwanath Pawar and Praveen Pramod Tewari)

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