Budget position now in far better shape

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Josh Frydenberg is expected to hand down a budget in far better shape than was expected just a few months ago due to the economy performing much stronger than predicted.

But economists are warning the treasurer not to rush in and start cutting the budget to get debt back on an even keel, saying he needs to be patient after the shock after last year's deep recession.

However, the better budget position will allow for some targeted policies to be introduced and for a promised aged care package to go ahead when it is released on May 11.

Senior government minister Karen Andrews declined to comment on media reports the government is putting together a $10 billion aged care budget package.

"Aged care is a significant issue for our government and for the people of Australia," she told Sky News' Sunday Agenda program.

"We established the royal commission to look at aged care and we have made it very clear that there will be a comprehensive response to that."

But Opposition Leader Anthony Albanese said the $10 billion figure being speculated is a "drop in the ocean" compared with the crisis in aged care.

"The government had a report which was titled neglect," he told reporters in Hobart.

"We have maggots in wounds. We have an extraordinary number of aged care residents who literally aren't getting enough to eat."

In the mid-year budget review released in December a $197.7 billion budget deficit was forecast for the 2020/21 financial year and a $108.5 billion deficit for 2021/22.

"On budget night the treasurer will announce deficits that are substantially lower because the economy is substantially better," Deloitte Access Economics economist Chris Richardson told Sky News.

Warren Hogan, economic adviser at Judo Bank, agreed the budget will be in a much better position due to lower unemployment, stronger economic growth and higher commodity prices, particularly for iron ore.

But he advised the government to be patient and avoid the temptation of tightening fiscal policy too soon.

"This government likes to get the budget back into order quickly, that's not the right strategy right now. Allow the economy to do the repair for the time being," he told Sky News.

"The government needs to be patient, it needs to stick to its plan and allow the strong economy to be the major driver of budget repair for at least the next 12 months, if not a big longer."

AMP Capital chief economist Shane Oliver believes the deficit could now be $125 billion for 2020/21 because the strength in employment means a surge in personal tax revenue.

"The starting point could for the 2021/22 budget could now be around $50 billion," Dr Oliver said in a note to clients.

When the pandemic and subsequent recession first hit Australia's shores, Mr Frydenberg said he did not intend to start budget repair until the unemployment rate was comfortably below six per cent.

The unemployment was 5.6 per cent in March.

"We're already there, but we need to go further," Mr Richardson said.

"The Reserve Bank aims for an unemployment rate of 4.5 per cent. The government should shift its line in the sand aiming for an unemployment rate comfortably under five."