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The pandemic and its budgetary consequences

Brian Parker, Chief Economist

The COVID-19 pandemic has resulted in the worst Australian and global recession in living memory, as measures to contain the virus produced savage falls in employment and output.

The impact of the pandemic has been felt most acutely in the service industries, such as accommodation and food services, arts and recreation, and airlines, where activity virtually collapsed.

The economic pain has also fallen disproportionately on lower income earners, workers at each end of the age spectrum and women. At the worst point of the crisis, around 875,000 jobs were lost with women accounting for around 55 per cent of those.

The strength of Australia’s economic recovery depends heavily on virus containment, but also on the willingness of consumers and businesses to spend, hire and invest. There is some evidence of “pent-up demand’ in the household sector – the household saving rate surged in the June quarter as consumers were effectively denied some of their usual avenues for spending.

The centrepiece of the government’s budget, the JobMaker Plan, targets both households and businesses with a range of measures to boost activity and confidence and adds to what has already been a massive fiscal support effort for the economy.

For businesses with a turnover of less than $5 billion, there are opportunities for the full depreciation of assets as well as the ability to apply to claim losses as a result of the COVID-19 recession as a tax refund against tax paid on previous profits back to the 2018-19 financial year. There is a Hiring Credit to give businesses an incentive to hire those younger workers worst affected by the COVID recession.

However, business decisions to invest and hire depend in no small part on their level of confidence about future sales and profitability. To this end, efforts in this budget to boost spending include boosting near-term infrastructure spending by providing funding to the states for “shovel-ready” projects and bringing forward to this year the so-called Stage 2 tax cuts that were previously legislated to commence in 2022-23. Given the proportion of those tax cuts that accrue to lower- and middle-income earners, it is reasonable to assume that much of the additional disposable income will be spent rather than saved.

As promised the Budget numbers are eye-watering. The Budget deficit is expected to be $213.7 billion this financial year or 11 per cent of GDP, the largest such figure outside of wartime. Gross debt is expected to peak at around 55 per cent of GDP, a figure that still leaves Australia’s debt position looking remarkably healthy on international comparisons.

Constructing the economic forecasts underpinning the budget is extraordinarily difficult at the best of times and these are clearly not the best of times. However, key assumptions underlying this budget are that any further outbreaks will be quickly contained, Victoria will re-open in line with the state government’s roadmap, and, perhaps more uncertainly, that a vaccine will be successfully developed and widely available to Australians by late 2021 with social distancing being in operation until then.

Migration has been a key driver of Australia’s economic performance and the assumptions on population growth do not auger well for a robust economic recovery. Net migration is forecast to be negative this financial year. International students and permanent migrants are assumed to return only gradually from the latter stage of 2021.

It’s also important to remember that the federal Budget rarely makes any difference to the way Sunsuper or indeed any other major superannuation fund invests members’ money. While the confirmation that the Australian economy will continue to benefit from ongoing fiscal support is clearly good news in the short term, from an investment perspective, it’s the medium- to long-term outlook for the Australian and world economies, inflation, interest rates, corporate earnings that are critical in determining what kind of investment returns our members will achieve.