Date posted: 10/05/2021 5 min read

Australian Budget 2021-22 to fuel growth through jobs

The Treasurer will keep his fiscal foot on the accelerator for now without wanting to be seen to be reckless

In Brief

  • The rapid economic recovery gives the Government room to keep spending and address social issues
  • The fiscal deficit will probably be about A$100 billion lower than expected over four years
  • Economists will be looking for a long-term plan to rein in the debt burden

Australia’s Treasurer, Josh Frydenberg, will unveil the Federal Budget tomorrow amid signs the economy is racing into recovery. Yet he’ll do little to rein in a gaping fiscal deficit.

With vulnerable sectors still reeling from the impact of COVID-19, and with his eye on an election in 2022 if not before, he’ll emphasise the Federal Government’s role in nurturing economic growth, with a strong focus on bolstering employment, economists say.

Frydenberg has already discounted spending cuts or measures to raise additional revenue. This will mean a fiscal deficit of about A$168 billion, according to Access Economics, with debt expected to balloon out to A$1 trillion by the end of the decade.

For Australians used to being lectured by a fiscally conservative Coalition about the dangers of “debt and deficit” the softening of fiscal policy seems uncharacteristically pragmatic.

“It looks as if Frydenberg is going to take his time about repairing the fiscal deficit, and I think that's the right thing to do,” says Donal Curtin, an economist and consultant for Chartered Accountants ANZ. “The global outlook is still uncertain and there are lagged effects yet to happen, especially in sectors dependent on open borders like tourism and education.”

Access Economics estimates that the combination of an employment rebound, better-than-expected revenue and lower-than-expected spending, means the budget deficit over four years will be almost A$100 billion less than initially forecast.

This is a windfall that has given the Government the chance to respond to social needs, such as aged care and childcare services.

The Commonwealth is expected to spend at least A$10 billion more on aged care services over the next four years and invest an additional A$1.7 billion in childcare subsidies – although leading organisations in both sectors say much more is needed.

“The IMF’s advice to everyone is to be careful about normalising fiscal policy to avoid pushing people and sectors over a cliff – and that's surely right,” says Curtin. “Plus, the strength of the rebound from COVID-19 for Australia means the fiscal hole isn't as deep as it first looked.”

The unemployment rate in March dropped to 5.6% – back to levels of early 2018 – though most commentators say the rate is still too high and “well above the full employment level, which is likely to be below 4%,” according to Bill Evans, chief economist for Westpac.

Consumer sentiment has shown an extraordinary bounce. The Westpac-Melbourne Institute Index of Consumer Sentiment in April rose to its highest level since August 2010, suggesting consumers will be the key driver of above-trend economic growth in 2021.

The housing market is booming. Building approvals have surged to near record levels. Australian shares have risen over the past 12 months: the ASX 200 is points away from levels before the pandemic hit.

“There is a massive wealth effect continuing to unfold across Australia,” tweeted economist Stephen Koukoulas. He’s now forecasting a wages boom as the private sector struggles to find enough employees.

“For the first time in about a decade, widespread skills shortages, unexpected economic strength, no immigration and a rampant surge in household wealth are unleashing a reversal in wage oppression that has dogged the economy for so long,” he wrote in Yahoo Finance.

Curtin notes how the Australian Government is willing to use fiscal policy more actively than before to get the unemployment rate below 5%. “It's now a lot clearer, with the success of programs like JobKeeper in Australia, that you can use the fiscal levers more effectively than you might have imagined,” he says.

Still, if spending is going to be kept higher than pre-COVID levels, he says there needs to be close attention paid to the quality of programs, including JobMaker. “We need to make sure we’re not just seeing electorate-friendly feel-good stuff.”

The deficit will need to be reined in at some stage given the uncertain international environment. “I'd want to see the Treasurer map out the long-term plan for getting debt back down to ready-for-the-next-rainy-day levels,” says Curtin.

Australian Federal Budget 2021-22

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