Ministerial Statement

Budget and Economic Update

The Hon. R.I. LUCAS (Treasurer) (14:18): I seek leave to make a ministerial statement.

Leave granted.

The Hon. R.I. LUCAS: This week I would have delivered the 2020-21 state budget in another place, but instead I remain amongst friends and colleagues to deliver a budget update in much cheerier circumstances. I just wish the news was cheerier as well.

With the focus on protecting and supporting our communities through the coronavirus pandemic, the commonwealth government took the decision to delay its 2020-21 budget to October, with all state governments to deliver their 2020-21 budgets later in the year. As the parliament is aware, South Australia's budget will now be delivered on 10 November.

The South Australian community has worked together like never before and done an excellent job adhering to the social distancing and other restrictions required for us to deal with the virus. We have successfully flattened the curve more than even the most optimistic projections several months ago, although of course we acknowledge the sad loss of four South Australians to the virus.

While South Australia has now had an extended period without a significant number of cases, this outcome has not come without a cost to the economy and the budget position. Today, I provide an update on the South Australian economy and the budget.

The front line of the COVID-19 response has been our health services and the need for them to be prepared and respond as the pandemic developed. We have provided significant additional funding to the health sector in conjunction with the federal government to fund a nation-leading testing regime, a significant increase in ICU capacity, enhanced mental health resources, and ensuring sufficient supplies of protective equipment and ventilators.

This was critical preparatory work which, together with the expertise and commitment of our Health staff, has resulted in our state's impressive health responses. As health costs associated with COVID-19 continue to be incurred, a total estimate of costs will be detailed later this year in the budget.

In addition to the health crisis, of course, COVID-19 has created an economic crisis as well. In response, the government has announced two large stimulus and support packages that have provided a wide range of programs and support payments to businesses and residents in need. The $350 million stimulus package announced on 11 March provided funding across a range of areas, including:

bushfire response and recovery;

roads infrastructure;

an additional $70 million to the Economic and Business Growth Fund; and

investment in nature-based tourism, local government projects through the Planning and Development Fund, country health facilities, social housing and grassroots sports facilities.

The Jobs Rescue Package of $650 million was announced on 26 March to provide targeted support, including:

$300 million for the Business and Job Support Fund;

$250 million for the Community and Job Support Fund;

Cost of Living Concession additional payments; and

payroll tax relief and land tax relief.

The business and community jobs funds have been the vehicle to support industry sectors and small businesses in need. These funds have been used to support many organisations, including:

$10,000 grants to around 19,000 South Australian businesses;

land tax and other financial relief to support tenants and landlords;

sporting associations funding to survive;

support for international students in South Australia;

rent relief for government tenants;

support for the taxi industry and regional tourist bus operators; and

support for local government childcare providers.

To date, approximately $840 million of the total $1 billion in stimulus funding has been allocated. It has, of course, been necessary to estimate the value of each support measure in an environment of significant uncertainty. We understand there will be ups and downs in relation to the final costs of individual measures in recognition of the significant uncertainty on the timing and nature of restrictions.

For example, on 26 March 2020, the government announced a once-off boost of $500 and the bringing forward of the 2021 Cost of Living Concession for households that are receiving the Centrelink JobSeeker payment. This has provided substantial cost-of-living support to those households.

It was initially estimated that this program would cost around $27.5 million. Following that announcement, the commonwealth introduced its JobKeeper initiative, which meant that many Australians kept their jobs and did not need to go onto the unemployment or JobSeeker queue. As a consequence, year to date, the Cost of Living Concession support has provided $11.8 million of relief.

The state government recognises that the easing of restrictions will impact businesses and community organisations differently. While some organisations will face minimal impacts in the future, others will continue to be impacted for some time. It is therefore necessary to keep some capacity in our $650 million Jobs Rescue Package to provide further assistance as required in quarter one of financial year 2020-21.

In addition to the over $1 billion in stimulus through those two packages, the government has provided substantial further support and stimulus. The government has exempted JobKeeper payments to staff from both payroll tax and the return to work levy at an estimated cost of over $110 million, with that money staying in the hands of businesses across South Australia.

Spending across many government agencies has also been repurposed to directly support business and industry in need through a range of programs. For example, when possible maintenance expenditure has been brought forward to support tradies and small businesses.

In addition, the government has assisted many businesses by enabling deferral of fees, taxes and loans and the bringing forward of grant payments. These have included $150 million of payroll tax deferral, $180 million of land tax deferral, $53 million of gambling tax deferral, and $180 million of grants to non-government schools brought forward from financial year 2020-21 to financial year 2019-20.

The total value of all the stimulus provided by the government is now estimated to be around $2 billion. All these measures have provided much-needed cashflow benefits to businesses, industry and the broader South Australian community.

The government has also maintained and grown its commitment to invest in productive infrastructure to support jobs through this period and ensure our economy is well placed to respond as restrictions are raised. The government will continue its commitment to the record $12.9 billion infrastructure program. The government also acknowledges that we may need to provide additional support and stimulus for the economy, and further announcements will be made over coming weeks.

The government's priorities since the election have been to build a strong economy, grow jobs, lower costs and provide better services for South Australians. The government's policy direction has been driven by the view that the cost of doing business in South Australia must be nationally and internationally competitive to ensure our businesses are able to compete effectively.

This government has reduced the range of costs of doing business in South Australia. We have abolished payroll tax for small businesses, reduced land tax by $200 million over three years, cut emergency service levy bills by $90 million per year, reduced motor vehicle compulsory third-party premiums, taken steps to reduce electricity costs, and have recently announced significant water price reductions for South Australian businesses. An average business will receive savings on its water bill of $1,350 from 1 July 2020, but for many businesses the savings will be significantly higher.

There have been suggestions that the government should respond to the financial challenges arising from COVID-19 by increasing taxes and charges; however, the government will not be diverted from our commitment to providing a competitive environment for South Australian businesses. The government does not consider that the option of increasing taxes is a pathway to growing jobs and the economy.

Parts of the economy have been affected in different ways by COVID-19 restrictions. While some have been busier than normal levels, others have been closed down or have had to adapt to stay operating. Undoubtedly, the federal government JobKeeper program has helped businesses and our economy through these difficult times. Unfortunately, even with the assistance of governments not all businesses will survive.

Retail expenditure fell during April but appears to have returned to more normal levels, albeit with a shift to food and household goods and away from restaurants and cafes during that period. Hours worked fell by over 10 per cent in April, and the number of South Australians unemployed increased to 62,900.

The government has worked hard to keep open trade routes for exports in order to keep income for our businesses. With border closures we know the tourism sector is doing it tough, and we welcome South Australians now being able to holiday at home to help our tourism sector and our regions.

The most recent state final demand data showed that South Australian business, government and consumer spending contracted by 1.0 per cent in the March quarter. The projection for the June quarter is a further contraction of around 5 per cent, resulting in an estimated negative growth of 1.75 per cent for state final demand for the 2019-20 financial year. We know the economy is starting its recovery with the easing of restrictions, and we will provide projections of economic growth in 2020-21 and beyond in the budget in November.

Having inherited a budget deficit of $330 million in 2017-18 and a record of seven budget deficits in the last 10 years of the Labor government, in 2018-19 the government, in its first budget, delivered a $289 million net operating balance surplus in the general government sector. At the Mid-Year Budget Review we were predicting a $91 million surplus in 2019-20.

Clearly, the unprecedented impacts of the COVID-19 pandemic have resulted in a massive deterioration in the budget position of all governments. All governments are reporting significant increases in deficits and debt in response to COVID-19 impacts. As I outlined earlier, the government has provided significant assistance from the budget for the response to the pandemic and through stimulus to the economy.

In addition, the broad effect on the economy has meant that the normal revenue streams of government, including GST, payroll tax and conveyance duty, have all been substantially reduced over recent months and will take some time to recover. As an example, national GST receipts alone have been down in the order of 30 per cent per month, which is hundreds of millions of dollars each month in lower revenue for South Australia.

At the time of the 2019-20 budget, we were estimating GST revenue grants of around $6.8 billion in 2019-20 and $6.9 billion in 2020-21. While it is still very difficult to estimate the impact of the pandemic on GST revenue grants, our best estimates suggest that the state's GST revenue will be in the order of $850 million lower in 2019-20 and around $1.1 billion lower in 2020-21. Estimates of GST revenue in 2020-21 will obviously be impacted by the easing of restrictions and the pace of economic recovery.

It is also impossible to predict the final impact on state taxation revenues arising from the coronavirus response, but our early estimates suggest that payroll tax could be lower by $90 million in 2019-20 and $100 million in 2020-21, compared to estimates in the 2019-20 budget. Other government revenues will also be impacted, including stamp duty and gambling taxes. Total state taxation revenue could be $230 million lower in 2019-20 and $360 million lower in 2020-21, compared with estimates at budget time.

In addition, a number of government agencies, including the health department, have not achieved their budget in 2019-20. This relates in part to pandemic and bushfire related expenditure but also to additional services provided, some savings not achieved and some changes in timing to projects and revenues. While the local health networks have commenced taking steps to get their budgets under control, SA Health obviously has not been able to deliver its budget position in 2019-20. It is currently forecasting that it will require additional funding of around $220 million in 2019-20, compared with budget forecasts.

The government recognises that Health's focus in recent months has been on responding proactively to the COVID-19 challenges, which it has done well. However, it will be important for the state's longer term financial sustainability for Health to remain committed to delivering health services in line with national efficiency benchmarks, moving forward. TAFE SA has also been impacted by COVID-19 restrictions, as well as facing challenges in achieving necessary efficiencies. It is currently forecasting to require additional funding of $45 million in 2019-20 and over $50 million in 2020-21.

The government has chosen to maintain its record $12.9 billion infrastructure program. It could have helped the budget, including the increasing debt, by cutting infrastructure spending, but that is not the response that is needed. With all of these significant budget impacts, we are now predicting a net operating balance deficit in 2019-20 of $1.9 billion in the general government sector. Total non-financial public sector debt at 30 June is estimated to be around $18.1 billion, up from $16.5 billion estimated at the time of the Mid-Year Budget Review.

Of course, the budget impacts of COVID-19 are not constrained to 2019-20. With all of these impacts it is clear that we will have a significant net operating deficit again in 2020-21 and that debt levels will grow across the forward estimates. Our early estimate is that the net operating balance deficit in 2020-21 will be of a similar size to 2019-20, with non-financial public sector net debt to be around $30 billion by the end of the forward estimates. Other governments will be reporting similarly significant increases in their total public sector debt by the end of their forward estimates. More accurate forward estimate projections of the net operating balance and the net debt will be included in the 2020-21 budget when it is released in November.

Significant budget deficits and increasing debt are the inevitable consequence of fighting the COVID-19 pandemic. They are the inevitable consequence of spending what was needed to prepare our health system to fight the virus and also spending whatever was needed to save as many jobs and as many businesses and community organisations as possible.

The government now remains focused on supporting South Australians and our businesses as the economy transitions back to more normal operations. Our current policy responses are helping us manage a transition to an exciting future, which will be influenced significantly by the massive new opportunities in the defence, space and IT industry sectors. Over the coming months the government will announce a series of further initiatives, designed to help drive economic and jobs growth in South Australia.