Extreme budget deterioration will have serious and long-lasting implications

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The federal government will announce substantial deficits in the 2020-21 Budget but one analysis predicts it could hit a staggering $100 billion next year with the nation's debt set to top $1 trillion.

The dramatic new forecasts will trigger alarm bells for any industry or organisation with a reliance on the federal government.

According to Westpac's chief economist Bill Evans, COVID-19 and the response will see the Australian economy contract by 1 per cent through the first six months of 2020 before rebounding by 2.5 per cent in the second half of the year. He also predicts unemployment will reach 7 per cent by October.

BIS Oxford Economics issued an analysis suggesting the forecast $5 billion surplus in 2019-20 will now be a deficit of at least $40 billion. However, it said the forecast $6.1 billion surplus in 2020-21 is more likely to be a deficit of at least $100 billion.

The dramatic swing to eye-watering deficits will be caused by the combination of higher government spending on stimulus and lower tax revenue.

The federal government is expected to bolster last week's almost $20 billion stimulus package with a range of measures focussed on supporting impacted small businesses.

Yet the short-term spending boost will almost certainly have wider implications and be followed by measures to return the budget to balance over the long-term.

This could have immediate implications given current preparations for the 2020-21 Budget.