The federal budget will remain in deficit for at least a decade because of the lingering impact of the coronavirus pandemic, independent advisors have warned.
Treasurer Josh Frydenberg’s most recent budget forecast a deficit of $213.7 billion for the 2020/21 financial year.
At 11 per cent of gross domestic product, the Parliamentary Budget Office says this is around 2.5 times greater than the previous worst deficit of the last 50 years.
Mr Frydenberg will update his budget and economic forecasts in a mid-year review next week.
“The financial position is projected to improve over the medium term as a result of the anticipated economic recovery and the winding back of the COVID-19 related policy response,” the PBO said on Thursday.
It projects the budget position will improve over the medium term to an underlying cash deficit of $51 billion, or 1.6 per cent of GDP, in 2030/31.
“The near future remains highly uncertain, depending on both the health and economic situation,” the PBO said.
A slower-than-expected economic recovery or government spending associated with either additional virus outbreaks or fiscal stimulus would hamper improvements in receipts and affect payments.
“This would result in higher deficits and government debt,” the PBO said.
By contrast, if the Australian economy performs strongly, avoiding a prolonged period of weak productivity growth or negligible price growth, both the budget balance and debt position could improve faster.
The government projects that net debt will rise from 19.2 per cent of GDP, or $374 billion, in 2018/19 to 43.8 per cent of GDP, or $966 billion, in 2023/24.
The PBO expects net debt will gradually decrease to 40.9 per cent as a share of GDP at the end of 2030/31, although in dollar terms it will be $1.3 trillion because of a growing economy.
“Historically low interest rates mean that maintaining interest payments on higher debt levels is manageable, but the long-run improvement to the health of the budget will rely on economic growth,” it said.