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Budget Bothers- July 2020

The budget has continued to worsen amid rising infection rates in the state of Victoria, as fiscal assistance for pandemic-afflicted businesses and households have eaten dry government revenue. Latest statistics by Westpac have indicated the Federal budget deficit for 2019/20 and 2020/21 will reach $95 bn and $230 bn respectively, far overshooting the record $52 bn deficit recorded during the GFC.

The current budget balance has reflected an ongoing cyclical deficit, where revenue in the form of personal income tax and corporate tax has been cut due to factors such as the recent spike in the unemployment rate to 7.1%. This has only been complicated by the government's need to balance the easing of the JobKeeper program in September with sufficient stimulus to aid businesses affected by pandemic restrictions. In particular, industries that are especially exposed to the effects of the outbreak such as tourism and hospitality are likely to require further support when the cushioning effect of JobKeeper is removed.

As a result, we can expect deficit spending to extend further into negative territory, with policies such as personal income tax cuts and infrastructure spending likely to be brought forward in light of the continuing economic shock caused by the pandemic. With the deficit expected to increase in the next year, a notable economic cost of the worsening budget balance is a widening of government debt, with the deterioration forecast to amplify debt levels by an additional $336 bn. Given Australia's high level of debt due to its historic dependence on foreign sources of capital, financing the deficit will undoubtedly heighten our debt woes, signalling major implications for the CAD and our AAA credit rating.

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