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Government announces $184bn deficit

Treasurer Josh Frydenberg has announced the country's biggest ever peace-time budget deficit as the economic effects of COVID-19 are realised.

Frydenberg and Minister for Finance, Senator Mathias Cormann revealed the economic toll while giving an economic and fiscal update.

"The government has acted swiftly and decisively to provide economic support for workers, households and businesses of around $289 billion or the equivalent of 14.6% of GDP," they said.

"This necessary and unprecedented level of economic support, coupled with declines in taxation receipts of $31.7 billion in 2019-20 and $63.9 billion in 2020-21, has significantly impacted the budget position."

Australia's underlying cash balance is forecast to decrease from balance in 2018-19 to an $85.8 billion deficit in 2019-20 and a $184.5 billion deficit in 2020-21.

Frydenberg and Cormann said they support the government's fiscal measures, saying it shows strong management.

"We returned the budget to balance for the first time in 11 years which underpinned the capacity to respond to this unprecedented shock," they said.

"Our fiscal support is targeted, timely and temporary to ensure that it does not undermine the structural integrity of the Budget with all three major credit ratings agencies having now reaffirmed Australia's AAA credit rating during the pandemic."

The economic support in response to COVID-19 is estimated to have increased the level of real GDP by around 0.75% in 2019-20 and around 4.25% in 2020-21.

The fiscal measures are also estimated to have lowered the peak of the unemployment rate by around 5 percentage points.

Debt levels have also increased significantly as a result of COVID-19, however Frydenberg and Cormann said Australia continues to have a low level of debt-to-GDP compared to other countries.

"Net debt is expected to be $488.2 billion (24.6% of GDP) at 30 June 2020 and increase to $677.1 billion (35.7% of GDP) at 30 June 2021," they said.

"Once the economic recovery is established, stronger growth and an improvement in the fiscal position will help to stabilise government debt as a share of the economy."

Despite the government's economic support measures real GDP is forecast to have fallen sharply in the June quarter by 7%.

However, they said, the easing of health restrictions in line with the health advice is expected to deliver an increase in economic activity from the September quarter.

"There are some positive early signs in the recovery with indicators suggesting that the unwinding of containment measures in the latter part of the June quarter has led to a noticeable recovery in activity and jobs," they said.

"Household consumption is expected to lead the recovery with strong growth in the September quarter, while business and dwelling investment are expected to recover more gradually."

In mentioning the high level of unemployment, both Frydenberg and Cormann said it was through no fault of their own, saying unemployment will peak at 9.25%.

They said the economic and fiscal outlook remains highly uncertain and will provide further forecasts and projections over the forward estimates period and medium term in the 2020-21 budget which will be delivered on October 6.

Read our full COVID-19 news coverage and analysis here.

Read more: BudgetGDPCOVID-19Josh FrydenbergMathias Cormann
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