Australia Fiscal October 2020

Australia

Australia: Government tables stimulatory budget to sustain recovery following coronavirus blow

October 16, 2020

On 6 October, the government presented the 2020–2021 draft budget to Parliament, which includes both tax cuts and additional spending in an effort to boost the economy and spur job creation following the impact of the coronavirus outbreak. As such, the budget envisages a record-breaking fiscal deficit of roughly AUD 214 billion (10.7% of GDP). The plans come on the heels of the Central Bank’s ultra-expansionary monetary policy stance, and should help the economy to leave behind its first recession after almost 30 years of uninterrupted GDP growth.

The package includes bringing forward income tax cuts previously set for 2022, making them effective from 1 July of this year, in order to sustain household spending. It also contains a notable spike in expenditure, aiming to provide around AUD 14 billion in additional infrastructure spending to the states. In an effort to support job creation, the proposal assigns AUD 4 billion to incentivize firms to hire younger people and AUD 1.2 billion for wage subsidies for new apprentices. On top of that, the budget also includes measures to encourage business investment by granting instant asset write-offs worth around AUD 26.7 billion.

Looking ahead, the mix between extra spending and lower taxes, coupled with the Reserve Bank of Australia’s extremely loose monetary policy stance, will likely support a faster pace of recovery ahead. Moreover, although the measures will raise public debt, they should not pose significant fiscal risks given the country’s low debt-to-GDP ratio, and the extremely low level of government bond interest rates.

Commenting on the likely effects of the budget on the country’s economic perspectives, economists at ANZ stated:

“The Budget does not materially change our view on the economic outlook. The spending measures are a little less than we expected, particularly on the infrastructure side, but the investment incentives are larger. Rather than lift public spending further, the Government is clearly endeavouring to engineer a private sector recovery, with particular emphasis on investment. It will mean the mix of growth will be more tilted towards the private sector than we had previously expected.”

Consensus Forecast panelists see the economy expanding 3.2% in 2021, which is unchanged from last month’s forecast, and growing 3.3% in 2022.


Author: Massimo Bassetti, Senior Economist

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