Treasurer Josh Frydenberg will gloat when he unveils in the upcoming Mid-Year Fiscal and Economic Outlook that the federal deficit will be smaller in 2021/22 than expected despite the recent Delta wave. However, the bulk of the support during the lockdowns was provided by the states and their budget deficits widened sharply last quarter. With their revenue base more narrow and debt levels set to keep rising for years, state government bond spreads will keep edging up as the RBA winds down its bond purchases.
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