By any measure, the budget deficit for the 2021 financial year is going to be a big one.
And as the Morrison government prepares to present the figures on October 6, analysts are beginning to speculate just how big it will be.
On that front, CBA senior fixed income strategist Philip Brown says a figure of $200 billion is a “standard expectation” at present.
(For context, back in early March the government was on track for a $5bn surplus) in FY20. It’s now expected to be a deficit of around $84bn).
By extrapolating the current trends in government borrowing, Brown calculated that bond issuance is on track to fund a deficit next financial year that is more like $250bn.
And if the budget deficit does get that high, it will “probably come as a shock to the market”, he said.
Post-Covid budget blues
In a research note this week, Brown gauged the potential extent of the post-Covid deficit by matching up two key data inputs: the total of amount of bonds issued by the government; and the amount of cash it has on hand.
Since the 2021 financial year began, the Australian Office of Financial Management (AOFM) has issued $115bn worth of bonds, Brown said.
Matching that up with the AOFM’s cash holdings isn’t as easy, because it only reports the data monthly (at the end of August it held $72.65bn).
However, the RBA reports all the deposits it receives on a weekly basis.
And crunching the numbers, Brown highlighted that the RBA’s deposit figure corresponds closely with the AOFM’s cash figure, going all the way back to 2012.
Brown said that since June 24 (FY20 year-end), deposits at the RBA have increased by around $7bn.
In context, that’s a relatively modest increase. And concurrently, the government has issued another $95bn of debt in that time.
What that indicates is that the AOFM (an arm of the Treasury Department) is “borrowing because they need the money”.
Tracking the flow of government income against the RBA’s deposit data results in some large weekly fluctuations, but over the ~3-month period it results in a clear trend:
“On average in 2021 so far the government is spending $8bn more per week than it receives,” Brown said.
Fiscal paradigm
And to reach a deficit of $250bn in the 2021 financial year, the AOFM would only have to maintain a borrowing average of around $4bn per week.
A deficit that big may come as a surprise, particularly since the government flagged a figure of $184.5bn at its Economic and Fiscal update on July 23.
However, Brown noted that he reached the $250bn figure by extrapolating AOFM bond issuance at levels which are “much slower than the current run rate”.
In addition, Treasurer Josh Frydenberg said in a speech yesterday that he’s committed to running a budget deficit until the unemployment rate is comfortably below six per cent.
So far this year, record government spending measures have acted as one of the most critical support mechanisms for stock markets in the post-Covid landscape.
And with that in mind, investors will be watching closely for details about the fiscal spending outlook when the government hands down its budget on October 6.