The economic recovery in Australia is well underway and has clearly been stronger than expected. GDP increased by a strong 3.1 per cent in the December quarter, boosted by a further lift in household consumption as the health situation improved, leaving GDP just 1.1 per cent below year-ago levels. Macroeconomic policy, particularly fiscal policy, has been crucial in supporting households and businesses during the worst of COVID.
Following on from Treasurer Frydenberg’s speech of a fortnight ago, last night’s Budget extends the fiscal policy support for the economy. This is entirely sensible: turning off the fiscal tap at this point would have been far too premature. Even after a better-than-expected recovery, unemployment and underemployment remain too high, wage and price inflation too low. There isn’t a surplus in sight and, frankly, there doesn’t need to be at this point.
The stronger economy and much higher than expected commodity prices (iron ore, most notably) have allowed the government to boost spending across a range of areas; extend tax breaks for low and middle income earners; and extend the full expensing of depreciable assets, while still produce a significant improvement in the budget bottom line. The spending priorities in the Budget have been well-flagged – additional spending on aged care (although way short of the Royal Commission’s recommendations), additional funding for childcare, and a range of measures aimed at boosting women’s economic security.
Since the October 2020 Budget, a better economic outlook and higher commodity prices (“parameter variations”) have improved the bottom line by around $121.8 billion from 2020-21 to 2023-24. Policy decisions have offset “only” about $87.7 billion of that. Over the Budget forward estimates, the deficit narrows from $161 billion (7.8 per cent of GDP) in 2020-21 to $57 billion (2.4 per cent of GDP) in 2024-25. However, this is largely due to a smaller deficit in 2020-21 and a further, more modest, improvement in 2021-22. From 2022-23, deficits widen again as the effects of new policy more than offset the improved economic outlook.
Constructing the economic forecasts underpinning the Budget is extraordinarily difficult at the best of times, and these are clearly not the best of times. Overall, the Budget economic forecasts are reasonable enough under the circumstances. Budget forecasts are always subject to a range of assumptions that often present easy targets for criticism. This Budget assumes that a population-wide vaccination program is in place by the end of 2021. In the meantime, localised outbreaks of COVID-19 will be effectively contained. A gradual return of temporary and permanent migrants is assumed to occur from mid-2022. Small phased programs for international students will commence in late 2021. Inbound and outbound international travel is expected to remain low through to mid-2022, after which a gradual recovery in international tourism is assumed to occur. Iron ore prices that have soared above US$200 per tonne of late are assumed to decline to US$55 per tonne by the end of the March quarter of 2022.
As we’ve indicated in previous post-Budget reports, 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 and corporate earnings that are critical in determining what kind of investment returns our members will achieve.