On Thursday the treasurer, Josh Frydenberg, gave a mid-year economic update predicting a solid economic bounceback from Covid restrictions.

We’ve looked under the hood to see what the treasury’s crystal ball says is in store for the economy, what might go wrong, and how government finances will fare if they’re right.

Forecasts

The budget papers project the Australian economy will grow in real terms by 3.75% in 2021-22 and 3.5% in 2022-23, before easing back to 2.25% and 2.5% in the final two years of the forward projections.

The unemployment rate is tipped to fall to 4.25% in that time. The treasury thinks Australians will be ambitious with their pay demands and bosses generous in a bid to keep workers, because wages growth is supposed to take off from 2.25% in 2021-22 to 3.25% in 2024-25.

Inflation is projected to reach and stay at the mid-point of the reserve bank’s target range (2.5%) in 2022-23.

Assumptions

The treasury has assumed that with more than 80% of Australians aged 16 and above now vaccinated, rates will climb to more than 90%. So far so good.

But the rest of the assumptions are … a little rosy. The treasury assumed lockdowns will no longer be required, with “most domestic activity restrictions” lifted by the start of 2022 and only basic density restrictions in place.

There may be “temporary strengthening of activity restrictions” to contain localised outbreaks – but these short, sharp lockdown-like restrictions are assumed to have no material impact on the outlook.

Remaining state border restrictions are assumed to be lifted by early 2022 and the Omicron variant “is not assumed to significantly alter current reopening plans or require a reimposition of widespread health and activity restrictions”.

Migrants will start returning from 2022, with international students ready to go for the first semester of next year.

What could go wrong

In a word: Covid. If a new variant of concern emerges (beyond Omicron) requiring more significant health responses, the international border could be closed for another six months and public health orders and precautionary behaviour could drive down spending. The treasury projects this could mean 1% is shaved off gross domestic product in 2021-22, and unemployment is about 1% higher. The rebound would instead come in the second half of 2022.

The papers also note that revenue assumptions and nominal GDP are also sensitive to changes in the iron ore price, with a US$10 fall shaving $3.9bn off GDP this year and $0.9bn off tax receipts next financial year.

If the government has to pay higher interest rates on bonds, then debt could blow out by a further 5.4% of GDP by 2032.

$16bn of mystery spending

The budget papers reveal that there is about $16bn of mystery spending over the next four years, consisting of decisions taken but not announced, or measures for which the cost is not-for-publication. That’s more than 10 times the size of mystery spending last year.

The papers make it impossible to calculate the size of the war chest for announcements to be made before the election, by mixing in a bunch of commercially sensitive spending items like vaccine purchases. But a treasury official in the lockup suggested it was about half and half … so, an $8bn war chest for the election.

There will also be $940m more revenue collected due to decisions taken but not announced or not for publication measures.

Debt and deficit

For a government previously concerned with the debt and deficit disaster, there is still red as far as the eye can see. The deficit is tipped to be $99.2bn in 2021-22, an improvement of $7.4bn since the budget despite the Delta lockdowns. The deficit will still be $57.5bn in 2024-25 (or 2.3% of GDP), and only shrinks to 1.8% of GDP in 2031-32.

Net debt is projected to be 30.6% of GDP at June 2022, rising to a peak of 37.4% in 2025, then down to 35.5% in 2032.

The papers say that despite the economic recovery the government is sticking with the first plank of its budget plan – strong and sustained recovery – so don’t expect austerity measures to try to cut the debt and deficit.