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Economic predictions to be taken with a grain of salt, says PBO

Adrian Flores
Adrian Flores
24 August 2020 1 minute readShare
Economic predictions to be taken with a grain of salt

Any future modelling of an economic recovery remains highly uncertain because it assumes there will be no further fiscal measures than the ones already in place, the Parliamentary Budget Office concedes.

The PBO said any medium-term economic and fiscal outlook assumes that the government’s COVID-19 policy response measures are temporary.

The fiscal scenarios laid out by the PBO incorporate the Commonwealth government’s published costs for all measures taken since the 2019–20 MYEFO, including the impact of COVID-19, as published in the government’s July Economic and Fiscal Update.

Additionally, the scenarios include the $15.6 billion impact of the JobKeeper payment extension as announced on 7 August 2020.

“Any new spending measures, unless offset by other savings, would result in a further deterioration in the fiscal aggregates in these scenarios,” the PBO said.

Even assuming no new measures are introduced, the PBO analysis shows that the impact of COVID-19 may result in Commonwealth government net debt in 2029–30 being between 14 and 24 per cent of GDP (up to $800 billion), higher than it would have been otherwise.

“The pandemic results in higher net debt due to lower receipts from slower economic growth and the significant policy response in 2019–20 and 2020–21,” it said.

“The resultant impact of increased borrowing endures through to 2029–30.”

The PBO said other uncertainties with its current economic outlooks are that no enduring economic impact from the downturn is factored into the scenarios, except for the permanently lower price level and the effect of lower net overseas migration in 2019–20 and 2020–21 on potential economic growth.

As a result, it said any additional ongoing negative impact on economic growth, such as on workforce participation rates or productivity growth, could result in a further significant deterioration in fiscal aggregates.

Further, the PBO said all of its economic forecast scenarios are sensitive to key assumptions such as interest rates returning to their long-run average over the medium term, consistent with the 2019–20 Mid-Year Economic and Fiscal Outlook methodology.

“The impacts are also sensitive to future paths for domestic and international prices,” it said.

Economic predictions to be taken with a grain of salt, says PBO
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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