The Treasury says COVID-19 could wipe $34 billion from Australia's economy this year.

The head of Australia's Department of Treasury told Senate estimates that modelling suggests the virus will wipe at least 0.5 percentage points off growth in the March quarter – over double the predicted impact of bushfires.

That figure is only the estimated impact on tourism, education and exchange rates – excluding other industries.

If it plays out as predicted, the economic fallout will be higher than the entire growth of Australia's economy in the December quarter, leaving it deeply exposed to recession.

Dr Kennedy said the virus would “undoubtedly” have an impact on the effectiveness of the budget's fiscal stabilisers.

He said that letting the budget to go into deficit to support much-needed growth would be “entirely consistent with a medium-term fiscal framework”.

“It would be a matter for the Government to take those decisions, but there would be some immediate measures that would be sensible to make people feel comfortable about their cashflows and support employment,” Dr Kennedy said.

“But then there are other measures that run across the course of the year or two which are important to just elevate the recovery.”

Treasurer Josh Frydenberg suggests some kind of stimulus package will be forthcoming.

“We'll have a series of measures that is responding in a targeted, scalable way but also a responsible way,” he told reporters.

His comments so far suggest infrastructure projects will be brought forward.

The Morrison government has also reached an agreement with states and territories to bear the health costs of tackling COVID-19 on a 50/50 basis.

Prime Minister Scott Morrison said it is a stand-alone arrangement costing $100 million upfront, and will not be linked to any other funding arrangements.

Dr Kennedy said the Government's response to the crisis would need to be dynamic enough to evolve with the crisis.

He said there have already been some supply and demand impacts of the virus on the economy, and that he expects concerns from households and businesses will create new demand issues in the future.

“In other words, confidence will be affected,” he said.

“The demand impacts will likely outweigh the supply impacts and increasingly so over time.

“Given the characteristics of this shock, support for businesses will be important to encourage businesses to maintain employment. Assistance should be targeted to those businesses and sectors most materially affected.

“[But] as the immediate health concerns fade, support for aggregate demand will become more important.”