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Need to recalibrate the fiscal strategy: Frydenberg

Federal Treasurer Josh Frydenberg said the medium-term effects of COVID-19 have made it necessary to recalibrate the government's fiscal strategy ahead of the budget release.

Frydenberg said the government will continue to offer strong economic support to reduce the longer-term economic scarring.

"Despite our success in cushioning the blow from COVID-19, we know that this crisis will have long-lasting effects on Australia's economy and on our fiscal position," Frydenberg said.

"Our economy will be persistently smaller as a result of the pandemic than forecast in the 2019-20 MYEFO, both in real and nominal terms."

Frydenberg said in the near-term, real GDP is forecast to grow strongly, but will come off a lower base.

By the end of 2020-21, Frydenberg said Australia's real economy is expected to be around 6% smaller than forecast in the 2019-20 MYEFO.

As a result, Frydenberg said, a smaller economy, with lower price and wage growth, will generate less income for the government over the medium-term.

In a hint of what to expect when the budget is revealed next month, Frydenberg said income taxes will grow more slowly, reflecting a smaller wages bill, corporate taxes will also grow more slowly, reflecting lower profits and economic activity and, consistent with previous downturns, corporate tax receipts will recover more slowly than the broader economy.

"This is because businesses are able to deduct losses that occur during downturns against profits in future years, lowering the tax they would otherwise pay," Frydenberg said.

"In the July Economic and Fiscal Update, we estimated that total receipts as a share of GDP would decline from 25.1% to 24% in 2020-21. The Budget will show this ratio remaining below pre-COVID levels across the medium-term."

Frydenberg said in the near-term, payments will spike as a result of large-scale and temporary economic support, but over the medium-term, the level of payments is likely to remain broadly comparable to earlier estimates.

"So, as you can see, the changes to our economy that flow from this COVID recession will have a lasting impact on our budget position, even as our targeted policy support is unwound," he said.

"Lower tax receipts and higher spending as a share of the economy will impact our fiscal position for many years to come. Even as the economy recovers."

"This is the nature of this unprecedented COVID-19 recession."

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

Read more: BudgetCOVID-19Josh FrydenbergFiscal Update
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