Australia / Analyst Insights
Key Insights From The 2020-21 Federal Budget

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by IBISWorld
Oct 07 2020

The Federal Government has revealed a budget that would have been unthinkable prior to the COVID-19 pandemic. At the December 2019 budget update, the Federal Government had forecast a $6.1 billion surplus for 2020-21. Following a global pandemic and an unprecedented economic shock, the fiscal deficit is now expected to surge to $213.7 billion in 2020-21, up from $85.3 billion in 2019-20. This deficit is equivalent to 11.0% of real GDP, an outcome not seen since the end of World War II.

The budget outlook period to 2023-24 is fraught with uncertainty, particularly as no one can be sure if and when a vaccine will be developed and become available. According to the government, real GDP is expected to decline by 1.5% this year, before rebounding by 4.75% in 2021-22. This projected growth rate would be the highest experienced in the last century. The government expects population growth to rise by a marginal 0.2% in 2020-21 and 0.4% in 2021-22, representing the slowest growth in over a century. Net overseas migration is expected to be negative for the first time since 1946.

The debt-fuelled recovery plan laid out in the budget outlines an economy led by the private sector, with the government clearly emphasising support for business investment. Amid the ongoing disruption of the COVID-19 pandemic, the budget papers provide several key takeaways.

Unprecedented debt is no longer a limiting factor on government spending

In normal economic times, government spending as a share of total economic activity has remained close to 24%. In 2020-21, government spending is expected to surge to 35% of real GDP, or $677 billion. This proportion far eclipses the previous record for government spending, which was 27.6% by the Hawke Labor Government in 1984-85. Australia’s net debt is expected to rise to $703.2 billion in 2020-21, equivalent to 36.1% of real GDP. In comparison, government debt represented only 3.7% of GDP during the height of the global financial crisis. The government forecasts that net debt will peak at $966 billion, the equivalent of 44% of the national economy, in 2023-24.

While these debt levels are eye-watering, Australia’s debt repayment burden has actually declined relative to 2018-19 due to record low interest rates. The market yield on 10-year Australian Treasury bonds is currently close to 1%, far below the 5.5% rate in 2009-10. In 2020-21, government interest expenses on outstanding debt are expected to cost only $17.2 billion, equivalent to 0.9% of real GDP or $1.79 per member of the population per day. Despite Australia’s high level of debt, the country’s national finances remain in far better shape relative to other developed nations. While debt is anticipated to continue rising over the period through 2023-24, the scale of annual deficits is forecast to decline. As long as the Federal Government can remain committed to a credible plan to scale back spending, Australia’s credit rating will not likely be downgraded from AAA.

Business, rather than government, will need to lead the rebound

The budget is full of measures to spur a broad economic recovery, with relatively little emphasis on supporting specific industries. While the government has offered $1.5 billion to prioritised manufacturing industries, the scale of these measures is small relative to tax cuts and business investment allowances, which make up the two largest reforms included in the budget. The government has clearly chosen to spur business investment by reducing taxation expenses, rather than directly spending to generate economic demand. According to government estimates, business investment is expected to decline by 9.5% in 2020-21 and rebound by 6% in 2021-22.

The government has unveiled $17.8 billion in tax cuts for middle income earners, which will deliver $42 per fortnight for individuals earning $85,000 a year, and about $99 for individuals earning $140,000. Companies in the retail sector may hope that this increased cashflow will drive consumer spending. However, severe consumer pessimism is expected to limit the impact of this stimulus, with negative sentiment expected to persist through to 2022-23. In an environment of high unemployment and falling house prices, the household savings ratio is anticipated to rise, limiting consumption expenditure. In addition, the ongoing rise of the Online Shopping industry, which grew by 11.1% in 2019-20, is forecast to capture an additional share of any increase in consumer spending. Overall, the outlook for retail in Australia remains bleak, as indicated by the Department Stores industry, which is expected to decline by 3.8% in 2020-21.

Several budget measures are set to drive a rebound in capital expenditure. A new allowance for businesses with turnover of less than $5 billion will enable these firms to deduct the full cost of capital assets up to $150,000. This measure, which is expected to cost $26.7 billion, is a clear attempt to drive a rebound in private capital expenditure on machinery and equipment, which declined by 6.4% in 2019-20. The government will also invest $2 billion through the Research and Development Tax Incentive to help innovative businesses that invest in research and development. Private research and development expenditure is expected to decline by 4.8% in 2020-21, following a 5.2% decline in 2019-20.

Industry-specific support items

In addition to the broad measures outlined above, the government has outlined a range of smaller funding measures to support specific industries.

Aged care

Close to $2.0 billion has been earmarked for the Aged Care Residential Services industry, including $1.6 billion for an additional 23,000 home care packages. Earlier this month, the Royal Commission into Aged Care Quality and Safety released a special report investigating the impact of the COVID-19 pandemic on the industry. The Federal Government has accepted all six recommendations in the report and is investing $40.6 million in its initial response. A further report on the implementation of these recommendations is expected to be delivered to Federal Parliament by December 2020.

Construction

Construction is key focus of the budget and is expected to be an integral element of the broader economic recovery. The Federal Government has announced $14 billion in new and accelerated infrastructure projects, primarily in the Road and Bridge Construction and Railway Track Construction industries. Key projects to be funded or upgraded include:

  • Stage 1 of the Coomera Connector in Queensland ($750 million)
  • The Singleton Bypass on the New England Highway in New South Wales ($560 million)
  • The Shepparton and Warrnambool rail lines in Victoria ($528 million)
  • The Coffs Harbour Bypass in New South Wales ($490 million)

The government has also announced a $4.5 billion upgrade to the NBN, discussed in detail here, which is expected to drive growth in the Telecommunications Infrastructure Construction industry. Regional infrastructure is also set to receive a boost from $2.0 billion for the National Water Infrastructure Development Fund, which will fund new dams, weirs and pipelines. This investment is expected to particularly assist the Agribusiness industry, which is also set to benefit from $328.4 million that has been set aside to minimise export regulations and red tape over the next four years.

Clean energy and environment

A range of clean energy programs have received small funding packages in the budget, including $70.2 million in development funds to set up a regional hydrogen export hub. The Australian Renewable Energy Agency is set to receive a $1.9 billion in funding over the next 12 years. However, this represents a reduction in overall funding relative to prior funding levels. The government will spend $190 million on the Recycling Modernisation Fund, which will upgrade infrastructure to sort plastic, paper, tyres and glass waste. This fund is expected to support the Waste Treatment and Disposal Services industry. The budget has also confirmed expenditure outlined in the Low Emissions Technology Statement, which was unveiled last month and has already been analysed by IBISWorld.

Outlook

The 2020-21 budget represents an unprecedented level of spending that seeks to revive an Australian economy hit by both health and economic crises. Despite the government’s focus on a balanced budget in recent years, this budget signals that the government has abandoned this principle. Australia has continued to grow its total debt since the global financial crisis, with the annual budget failing to return to surplus over the past decade. In the wake of the COVID-19 pandemic, government debt is on track to hit nearly $1 trillion in 2023-24, and monetary policy has been effectively exhausted. Australia must return its fiscal and monetary policy settings to normality in the coming years in preparation for the next crisis.

IBISWorld reports used to develop this release:

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