(Image: AAP/Mick Tsikas)

Two months ago, Treasurer Josh Frydenberg was triumphant. Delivering his second pandemic budget, he spoke of Australia’s strong economic performance during a pandemic that had devastated the world. Our recovery was looking V-shaped. And in spite of a slower than expected vaccine rollout, the country was on track for strong GDP growth.

But the key assumptions underpinning Frydenberg’s budget forecasts are already under pressure. An outbreak in Sydney has the country’s economic powerhouse facing weeks in lockdown, without the safety net of JobKeeper. Borders continue to slam shut around the country. The vaccine rollout stalls as Australia retreats further from the rest of the world. Just how badly will it pierce our plans for a rosy future?

What did Frydenberg assume?

Every budget comes with assumptions that underpin its forecasts for the future health of the economy. But the pandemic makes predicting the future fraught. The budget predicted GDP growth of 4.25% in 2021-22, and unemployment falling below 5% by 2023. But that’s contingent on the assumptions holding.

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The budget papers assumed “a population-wide vaccination program is likely to be in place by the end of 2021”. Frydenberg initially said that meant every Australian who wanted a vaccine would have two doses by the end of the year. But both Frydenberg and Prime Minister Scott Morrison walked that back. Morrison later said Australia being fully vaccinated or not wouldn’t have a material impact on the budget. But Australia’s rollout is still slow, undermined by supply issues and confused messaging from politicians and health officials.

The next assumptions — that localised COVID outbreaks would occur but be effectively contained, and that most domestic activity restrictions would be lifted — have also collapsed. For that, we have to thank the highly infectious Delta variant, which got ahead of New South Wales’s stellar contact tracers. The current outbreak is yet to be effectively contained, and a lockdown could continue for weeks. Meanwhile, there have been outbreaks in nearly every capital city in the last month. Despite crushing a cluster, restrictions are only just finally easing in Melbourne.

The Sydney outbreak has also put a dent in another premise of Frydenberg’s recovery — that sustained state border restrictions would be avoided. Victoria yesterday shut its border to NSW, and residents of greater Sydney are locked out of the rest of the country. That will likely continue for the duration of the lockdown. More absurdly, the residents of the ACT, which hasn’t recorded a case in over a year and has tough restrictions on arrivals from NSW, are locked out of Victoria, Western Australia and South Australia.

Finally, the budget assumed a gradual return of migration from mid-2022, kickstarted by small-scale programs for the return of international students later this year. While there have been some proposals, that’s all undermined by Morrison’s decision to halve the international arrival cap, under pressure from state premiers.

Are we screwed? Maybe not

While the foundations for Frydenberg’s optimism might be rotting, there’s still some scope to maintain optimism about the state of the economy. Until the last two weeks, growth in economic activity and employment was better than the budget anticipated.

And even with Sydney facing an indefinite lockdown — estimated to cost the country $1 billion a week — the overall impact on GDP and employment in the longer term might not be so substantial, according to independent economist Saul Eslake.

“A billion a week sounds like a lot, but in a context of a $2 trillion economy, it’s not a lot of percentage points, and a good deal of what’s lost in the lockdown will be made up afterwards,” he said.

That’s based on Victoria’s experience, where the state rebounded strongly after more than 100 days of lockdown. But there’s a key difference this time around — Victoria had JobKeeper, allowing businesses to stay afloat. Without income support, more workers are choosing not to stay home, increasing the likelihood of the virus’s spread. The NSW government looks set to provide its own version of JobKeeper. Today, the federal government’s expenditure review committee is expected to approve a support package for NSW businesses.

Where Australia could well struggle is the vaccine rollout. While our comparative success over other advanced economies last year was a result of successful suppression (aided by an accident of geography) and effective fiscal stimulus, Eslake warns we’ve rested on our laurels, and deliberately opted for a slow rollout.

That means in spite of an improving economy and strong employment figures, in part a short-term result of almost non-existent migration, Australia has fallen behind the world, and could become increasingly isolated.

“We’re losing the race, and this time next year, we’ll not look so good compared with the rest of the world,” Eslake said.

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Peter Fray
Peter Fray
Editor-in-chief
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