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Dr Shane Oliver on the 2020-21 Australian Budget

The 2020-21 Australian Budget

    ... spend, spend, spend as the focus remains on recovery and jobs, jobs, jobs 

       DR SHANE OLIVER

Key points

  • The Government now expects the Federal budget deficit to peak at a record $213.7bn this financial year. That’s around 11% of GDP, its highest since the end of WW2. The risk is the deficit will be worse at around $230bn.
  • Key measures include earlier tax cuts, massive tax breaks for investment & a new wage subsidy scheme.
  • Providing more stimulus & holding off on budget repair are the right thing to do. But it will be a long hard slog to get the deficit back down and stabilise public debt.

Introduction

The 2020-21 budget is a long way from the 2019-20 “back in black and back on track” budget. Last year, it was all about delivering the long-awaited budget surplus. This year it’s all about spurring recovery. So, the focus is on providing more stimulus to boost demand and in the process get unemployment back down to acceptable levels. As such, the projected budget deficit has blown out to a record $213.7bn and while it should fall from next year as emergency programs come to an end, the Government won’t shift the focus to budget repair until the unemployment rate is comfortably below 6%, which is likely to be at least three years away, and even then, a return to surplus is likely at least a decade away.

Policy stimulus

The key fiscal measures are:

  • a bring forward of the July 2022 tax cuts to July 2020. This will raise the start of the 32.5% tax rate bracket to $45,000 from $37,000 and raise the start of the 37% tax rate bracket out to $120,000 from $90,000 and increases the low income tax offset. It will mean tax cuts of $83 a fortnight for someone on $80,000 and $99 a fortnight for someone on $140,000 and refunds for higher tax already paid since July; 
  • instant expensing for tax purposes for any investment undertaken by businesses with turnover up to $5bn until 30 June 2022 and the ability to offset losses against previous profits to generate a tax refund;
  • a reinstatement of R&D tax breaks; 
  • a new JobMaker wage subsidy tied to employing young people to partly replace JobKeeper; 
  • $1.2bn to subsidise 100,000 new apprentices; 
  • an extra $3bn in infrastructure spending to state governments on a “use it or lose it” basis; 
  • more support for housing with an expansion of the First Home Loan Deposit scheme;
  • $1.3bn in initial funding to help encourage manufacturing;
  • more health spending and on aged care; and
  • more stimulus payments for welfare recipients.

There was little in the way of economic reform in this budget although some red tape will be removed for businesses.

The additional $83bn in stimulus measures since the July Economic and Fiscal Update takes total direct coronavirus support to $257bn. Along with loans & guarantees total Government and RBA support is now worth $507bn or 25% of GDP, spread over 5 years.

Economic assumptions

The Government is forecasting the economy to contract this financial year by -1.5%. But this masks a “record” -7% contraction in June quarter GDP and a gradual recovery from the second half of this year.

The Government is a bit more optimistic than we are in terms of economic growth and unemployment. A big factor constraining growth is that net immigration is expected to be negative resulting in population growth of just 0.2%, the lowest since 1917.

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Source  :  https://www.ampcapital.com/au/en/insights-hub/articles/2020/october/the-2020-21-australian-budget?csid=1135474858

 

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