Macroeconomic overview

Budget Review 2020–21 Index

Rob Dossor

This brief provides an overview of the key fiscal and economic numbers from the Budget Strategy and Outlook: Budget Paper No. 1: 2020–21. All quotes are sourced from this document unless otherwise indicated.

Domestic economy

Relative to the 2019–20 MYEFO, Government forecasts for key domestic macroeconomic parameters have been revised downwards, largely due to the COVID-19 pandemic. Table 1 below shows these, with the main changes being:

  • for 2019–20, real GDP growth has been revised down from 2.25% to –0.2%, a reduction of 2.45%. For 2020–21, real GDP growth has been revised down from 2.75% to –1.5%, a reduction of 4.25%. Real GDP growth is revised up for 2021–22 from 3% to 4.75%.
  • for 2019–20, nominal GDP growth has been revised down from 3.25% to 1.7%, a reduction of 1.55%.
  • for 2019–20, inflation, as measured by the Consumer Price Index, has been revised down from 2.5% to –0.3%, a reduction of 2.3%. However, the Government expects it to recover to 1.75% by 2020–21 and 1.5% in 2021–22, and to reach 2% in 2023–24, still lower than the long-run level of 2.5%, but just within the Reserve Bank’s target inflation rate of between 2% and 3%.
  • wage price growth has been revised downwards, again, for 2019–20, 2020–21 and 2021–22.
  • employment growth has, unsurprisingly, been revised down significantly for 2019–20, to –4.3%, but is forecast to grow to 2.75% in 2020–21.
  • the terms of trade have been revised up for 2019–20 and down significantly for 2020–21, reflecting a forecast decline in iron ore spot prices (with thermal and metallurgical coal prices forecast to remain steady).

Table 1: growth in key economic parameters at 2020–21 Budget relative to 2019–20 MYEFO

  Outcome Forecasts
2019–20 2020–21 2021–22 2022–23 2023–24
Real GDP 2.25 2.75 3.0 3.0 3.0
Change since MYEFO –0.2 –1.5 4.75 2.75 3.0
Nominal GDP 3.25 2.25 4.75 4.75 4.75
Change since MYEFO 1.7 –1.75 3.25 4.25 5.0
Consumer Price Index 2 2.25 2.5 2.5 2.5
Change since MYEFO –0.3 1.75 1.5 1.75 2.0
Wage Price Index 2.5 2.5 2.75 3.0 3.0
Change since MYEFO 1.8 1.25 1.5 2.0 2.25
Employment 1.75 1.75 1.25 1.25 1.5
Change since MYEFO –4.3 2.75 1.75 1.0 1.75
Unemployment rate 5.25 5.25 5.0 5.0 5.0
Change since MYEFO 7.0 7.25 6.5 6.0 5.5
Terms of trade –5.24 –4 –4.75 –8.75 n/a
Change since MYEFO 1.0 –1.25 –10.75 n/a n/a

Sources: Australian Government, Mid-year economic and fiscal outlook 2019–20, p. 3 and p. 18; Australian Government, Budget strategy and outlook: budget paper no. 1: 2020–21, Statement 1, p. 1-8 and Statement 2, p. 2-7.

COVID-19 impact on forecasts

The Budget assumes that general social distancing restrictions will continue until a vaccine is fully available and any new COVID-19 outbreaks are largely contained. It is not apparent whether this includes other restrictions. The Budget assumes that a population-wide Australian COVID-19 vaccination program will be fully in place by late 2021.

The Budget addresses two additional scenarios relating to the COVID-19 pandemic: that a vaccine is available earlier than forecast, and that there are additional outbreaks in Australia.

The first scenario assumes that the vaccine is available from 1 July 2021. This would support stronger consumption and investment and enable a growth in the number of international students studying in Australia. Under this scenario, GDP growth would increase by 1.5% ($34 billion) in 2021–22 compared to the forecasts in this Budget.

The second scenario assumes there are rolling outbreaks of COVID-19 that necessitate the reimposition of containment measures, on around 25% of the national economy, from 1 January 2021 to 30 June 2022. Under this scenario GDP growth would decrease by 1% in both 2020–21 and 2021–22 compared to the forecasts.

GDP projections

The Budget outlines that ‘potential GDP is estimated based on an analysis of trends for population, productivity and participation’ (p. 2-30). An increase, or decrease, in these trends will affect potential GDP.

Unsurprisingly the COVID-19 pandemic has affected these trends. Population growth, largely driven by migration, has fallen, which will lead to a smaller working-age population over the medium term. This in turn has affected the participation trend, as fewer working-age migrants are entering the country than had been previously, thus shifting the age structure of the population.

Productivity growth trends are also down. These growth trends will, however, at least partly, be offset by the Government’s economic support measures that ‘are expected to increase business investment and in turn lead to a higher labour productivity growth than otherwise would occur’ (p. 2-32).

Sensitivity analysis

Budget sensitivity analysis around nominal GDP growth forecasts suggests there is a 70% chance that average annualised nominal GDP growth in the two years to 2021–22 will lie in the range of –0.75% to 2% and a 90% chance that it will be –1.5% to 3%.

It is expected that household consumption will recover, following a record fall of 12.1% due to the COVID-19 pandemic, but consumption is expected to remain below its pre-COVID-19 level until the end of 2021. This reflects ‘continued restrictions, heightened uncertainty, dampened consumer confidence and weakness in income households receive from working’ (p. 2-16). The Budget anticipates that these effects will be partially offset by significant income support.

A scenario analysis explores the consequence of a 10% movement in world prices of non-rural commodity prices from 2020–21 relative to the Budget. This scenario assumes that the exchange rate will appreciate in response to an increase in prices. After two years, it is forecast that real GDP is unchanged, but nominal GDP is 0.25% higher, total receipts are up by $0.9 billion and the underlying cash balance improves by $1.2 billion.


Relative to the 2019–20 MYEFO, Government forecasts for world GDP growth have been revised down by 0.1% to 2.9% for 2019 and by 7.5% to –4.5% for 2020. These numbers are now closer to the IMF World Economic Outlook forecasts released in June 2020, which pointed to significantly weakened global growth due to the COVID-19 pandemic. For example the Budget states (p. 2-7):

The COVID-19 pandemic has caused a global crisis like no other in living memory. To protect the health of citizens, countries have closed or restricted movement across international borders, and locked down movement and activity within their economies.

These actions have weighed heavily on global activity, with historic contractions in GDP in some cases exceeding 20% and severe impacts on labour markets in the first half of 2020 across most of Australia’s main trading partners.

Growth of major trading partners has been revised down significantly for 2020, reflecting the continuation of measures to contain the COVID-19 pandemic. Eight of Australia’s top ten trading partners are expected to see a contraction in GDP in 2020, with China and Taiwan the exceptions.

Debt levels

Australia’s gross debt is forecast to reach $872 billion (44.8% of GDP) at 30 June 2021, before increasing to $1,138 billion (51.6% of GDP) at 30 June 2024. Despite this being a record level for Australia, it is still low in comparison to comparative countries.

Table 2: gross debt, by country (% of GDP)

Country Gross debt
  2020 2021
Japan 268.0 265.4
United States 141.4 146.1
Advanced G20 141.4 142.9
Euro Area 105.1 103.0
United Kingdom 101.6 100.0
India 84.0 85.7
Germany 77.2 75.0
China 64.1 70.7
Australia(a) 56.8 64.3
Korea 49.5 53.4

(a) Figures differ from the budget due to different calculation methodology and date.
Source: International Monetary Fund, World economic outlook update, June 2020.


All online articles accessed October 2020

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