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Australia unveiled a big-spending budget that aims to run the economy hot, joining the U.S. and Europe with a fiscal-monetary tandem that seeks to drive unemployment down to levels rarely seen in the past 50 years.
Treasurer Josh Frydenberg’s 2021-2022 fiscal blueprint aligns both economic orthodoxy with the political needs of a government facing an election in the next year. While the budget deficit in the 12 months through June 2022 is wider than expected at 5% of GDP, it leaves the opposition Labor party struggling for a narrative when the conservative incumbent is spending so freely.
“The budget continues the transition from crisis support to growth recovery,” said Chris Nicol, a strategist at Morgan Stanley in Melbourne. The program has “kept policy leadership in the fiscal court whilst signaling from the Reserve Bank of Australia continues to be one of patience — both aiming for a ‘hot’ economy with stronger jobs, wages and inflation.”
Frydenberg is joining international peers such as U.S. Treasury Secretary Janet Yellen in ramping up spending to push the economy toward maximum employment. His program is being buttressed by the RBA’s record-low interest rates, yield target and bond-buying program that aim to break a prolonged run of weak inflation.
The government is spending big on infrastructure, aged care and tax breaks for households and businesses. But it has given itself some wriggle room for later upgrades to the budget position by taking very conservative iron ore and jobless rate forecasts.
Iron Ore, Jobs
Treasury estimates iron ore will fall back to $55 a ton by the end of March 2022, from more than $200 a ton at present. It also sees 4.75% unemployment in June 2023, a quarter percentage point higher than the RBA’s latest estimate.
Finance Minister Simon Birmingham defended the forecasts in an interview with Bloomberg Television on Wednesday.
“People would accuse us of cooking the books if we were to make more ambitious assumptions,” he said. “We’ve maintained the conservative posture that is important to making sure that we actually have a budget that people can have faith in.”
The budget acknowledged “upside risks” for commodities as industry liaison suggests iron ore could remain elevated for an extended period. “Meanwhile, a stronger recovery in steel production outside of China could also provide further support for iron ore and metallurgical coal prices,” it said.
What Bloomberg Economics says…
“The government has proposed recycling the windfall back into the economy through higher spending and tax cuts. The slower pace of fiscal consolidation provides additional support to monetary policy, but not enough to hasten the withdrawal of the central bank’s stimulus.”
— James McIntyre, economist
For the full note, click here
The conservative government’s reorientation to big spender is a dramatic turnaround from just 18 months ago when it was driving toward the first budget surplus in a decade. At the time, Prime Minister Scott Morrison was dismissing calls for additional fiscal measures to support a relatively weak economy.
In that spirit, the government has set aside concern about debt for now, reflecting low borrowing costs and a better starting position than global peers.
Net debt is expected to be at 34.2% of GDP in June next year and peak just shy of A$1 trillion in June 2025, or 40.9% of GDP. That’s about half the U.S. and U.K. levels and about one-third of Japan’s, according to the budget papers.
Yet the road to an election by next May is clouded by a sluggish vaccination rollout. The budget assumes overseas borders will remain closed until the middle of next year, suggesting Morrison will be campaigning for another term while the rollout is still unfolding.
Another year of hardship for tourism and education is reflected in the budget allocating A$2.1 billion in support for aviation, tourism, the arts and international education providers.
Among other key spending items in Frydenberg’s fiscal blueprint are:
- A$7.8 billion to extend tax relief to low- and middle-income earning Australians
- A$20.7 billion for the extension of a temporary program for expensing and loss carry-back for assets bought by firms that has already supported a rebound of machinery and equipment investment
- A$15.2 billion in new commitments for road and railway projects across Australia
- $17.7 billion for the employment-intensive aged care sector; and
- A$1.9 billion for the Covid-19 vaccination strategy
Andrew Boak, chief economist for Australia at Goldman Sachs Group Inc., argues the government should be trying to drive down unemployment even faster. He contrasts this with the U.S., which expects to achieve full employment by the end of this year.
“The question is whether the budget is really ambitious enough,” he said. “On Treasury’s own forecasts they don’t get to full employment for more than two years from now against the backdrop of an inflation undershoot and super-low wages growth for over half a decade.”
Still, the budget was well received by the three major credit ratings agencies that reaffirmed Australia’s AAA rating.
Australia’s success in navigating the economy through the pandemic is clouded by a downward spiral in ties with its largest trading partner, China. Last week China announced it was suspending a ministerial economic dialog, while Australia is reviewing whether to force a Chinese company to sell a lease to a strategically significant port used by the Australian and U.S. militaries.
The budget papers acknowledged the threat in a thinly-veiled reference. “Ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports,” they said.
The government also faces increased pressure to step up efforts to cut greenhouse gas emissions as a consensus emerges among developed nations led by President Joe Biden.
The budget response is limited. It sets out A$1.6 billion for priority clean energy technologies.
“It was a missed opportunity to do things regarding cleaner and cheaper energy and in terms of diversifying our economy,” Shadow Treasurer Jim Chalmers said in a Bloomberg Television interview on Wednesday. The recovery “is hostage to a lot of uncertainty — the China relationship is one of them, but in the nearer term the vaccine rollout is slower than in” comparable countries.
Despite the challenges, the domestic economy looks set to roar, with Treasury forecasting GDP will rise 5.25% this calendar year, before cooling to 2.75% in 2022. The Australian electorate historically reward governments that demonstrate strong economic management.
Jill Sheppard, a political analyst at the Australian National University in Canberra, said the budget was politically expedient and a lot would have to go wrong in the next year for Morrison’s government to lose the next election.
The budget has “left the Labor opposition with very little to attack the government on,” she said in a Bloomberg Television interview on Wednesday. “Debt and deficit isn’t the order of the day any more — we see voters not so worried about that as they used to be.”
— With assistance by Paul Allen
(Updates with finance minister in seventh paragraph, Goldman Sachs in 17th.)