Australia: Government delivers stimulatory budget to boost recovery
May 20, 2021
On 11 May, the government unveiled its 2021–2022 budget, amid an ongoing and stronger-than-expected economic recovery from the downturn caused by the pandemic. In a bid to accelerate growth and drive the unemployment rate down, the government plans to ramp up spending and extend tax breaks, in tandem with the Central Bank’s ultra-loose stance consisting of record-low interest rates and a massive bond-buying program. The expected underlying cash deficit for the 12 months through June 2022 amounts to a sizable AUD 106.6 billion (around 5.0% of GDP). However, as the country boasts a strong record of prudent fiscal policies and low levels of public debt, the impact on fiscal risks is likely to be limited.
The main areas of stimulus are focused on infrastructure, the aged care sector and tax breaks for households and businesses. Over AUD 15 billion have been set aside for infrastructure projects such as roads and railways, with a view to improving productivity. Almost AUD 8 billion will be used to extend tax relief to low- and middle-income earners, while around AUD 18 billion have been earmarked for the employment-intensive aged care sector. Meanwhile, close to AUD 21 billion will be used to extend expensing and loss carryback measures for a further 12 months, in a bid to give some financial respite to crisis-hit companies. Lastly, the hard-hit tourism and education sectors have been granted just over AUD 2 billion in support, while almost AUD 2 billion have been reserved for the Covid-19 vaccination campaign.
Commenting on the government’s plans, economists at ANZ stated:
“The budget contains a lot more spending than we expected. This creates upside risk to the growth outlook, which is intentional. But it also increases the risk of overheating down the track. It will do little to dissuade the market from thinking RBA rate hikes will come sooner than 2024.”