Surplus hopes dashed for at least a decade due to pandemic: PBO

The federal budget will not return to surplus this decade with the independent Parliamentary Budget Office revealing the coronavirus recession will leave the nation's finances in tatters until at least the 2030s.

Just seven weeks out from Josh Frydenberg's first budget since the advent of COVID-19, the budget office on Friday released an updated analysis of the pandemic's impact showing the government's plans to clear net debt has also been destroyed by the coronavirus.

Treasurer Josh Frydenberg’s budget hopes have also been destroyed by the pandemic.Credit:Luis Enrique Ascui

After an estimated record deficit of $178 billion this financial year, the PBO says the government faces about a $47 billion bigger shortfall in the 2021-22 election year.

The closest the federal government will get to being back to pre-coronavirus estimates, on these forecasts, is a $29 billion deficit in 2027-28.

Net debt will be between 14 and 24 per cent, or up to $800 billion, higher in 2029-30 than it would've been without the pandemic with international travel restrictions weighing on population growth.

Before the pandemic, Treasurer Josh Frydenberg had planned to deliver a $5 billion surplus in 2019-20 and a $6.1 billion in 2020-21. In the last budget, the government forecast no net debt by 2029-30. This was updated mid-year to an expected 1.8 per cent of GDP by the end of the decade, down from 16 per cent forecast for 2022-23.

In July, Mr Frydenberg revealed the budget would be $85.8 billion in the red in 2019-20 and $184.5 billion in 2020-21 in the worst deficit since WWII.

"We can see the mountain ahead and Australia begins to climb," Mr Frydenberg said at the budget update last month.

"Australia is experiencing a health and economic crisis like nothing we have seen in the last 100 years."

The higher net debt now expected by the PBO is due to lower receipts on the back of slow economic growth and significant stimulus measures and record levels of emergency spending during 2019-20 and 2020-30 through wage subsidy scheme JobKeeper and higher benefits for those on JobSeeker. The federal government sold another $2 billion in debt on Friday.

The forecasts show the economy is particularly affected by lower net overseas migration due to global travel restrictions during the pandemic. Population growth is expected to return to its trend levels next financial year, but the impact of the restrictions will mean the future population is permanently lower than otherwise expected.

"The impact of lower migration alone results in around $16 billion less receipts in 2029–30 compared to the pre-pandemic levels," PBO said.

The economy is forecast to be 2.3 per cent smaller than it would have been but for the coronavirus recession in 2029-30, or almost $50 billion.

Between this year and the end of the decade, the cumulative impact to the economy from the virus is at least $220 billion based on the PBO's forecasts.

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