2020 Federal Budget: NAB Economic Commentary

The 2020 Federal Budget was one of the most stimulatory budgets we’ve ever seen.

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Commentary

As expected this is one of the most stimulatory budgets we have ever seen.

Broadly it is largely as expected. A key decision has been to backdate the Phase 2 tax cuts (worth $17.8bn over four years). The back dating of Phase 2 cuts is important as it helps fill the gap to consumers incomes from the reduction of JobKeeper and JobSeeker payments. It has also led us to revise up our near-term GDP forecasts and reduce the level of unemployment at the same horizon.

The biggest item in the budget was the instant asset write off for firms with turnover of less than $5bn (covering around 99% of businesses) – worth $26.7bn. It is very much aimed at encouraging business investment. Further in keeping with the tone of moving from “support to survival” extra money has been given by way of pay incentives to employ people, especially for under 35 year olds who were previously unemployed ($4bn). Also announced were wage subsidies for new apprentices ($1.2bn).

A surprise was not bringing forward the timing of “Stage 3” tax cuts (which the Opposition opposes) or permanently increasing the JobSeeker payment.

The expenditure items include bringing forward infrastructure spending by providing extra money to the States ($6.7bn) along with Commonwealth road infrastructure of $2bn. There was also a carry back tax provision (of around $4.9bn). There was extra money for manufacturing support ($1.5bn) and higher education ($0.9bn). Further, as previously announced, the laws on Responsible lending have been scrapped in an attempt to boost credit for SMEs.

The size of the total fiscal package can be seen from our analysis of the Structural Budget impulse using OECD methodology. That suggests a policy stimulus this year of around 7% of GDP. The implied fiscal tightening that follows as JobKeeper drops out sees the Budget position improving by around $100bn – or a tightening of nearly 5%. At a time when the economy is expected to grow by 4.8%. That in our view is a big stretch – either for the pace of Budget repair and growth.

In looking at the near-term deterioration in the Budget nearly all the work is done on the expense side – as is the subsequent repair process. Albeit, the structural Budget deficit is – even on these charitable assumptions still likely to be around 6% in deficit. Therefore, repairing the budget will be a protracted process, taking well over 5 years.

Overall, we have no problem with the focus on getting the economy going using fiscal stimulus. Structural reform would have also been useful but has not really been attempted apart from the tax cuts. We agree the issue of future debt is of little near term concern. The economy needs all the help it can get from fiscal policy. While the RBA may fractionally lower rates, that would have marginal impacts at present. The cost of credit is not the issue – rather it is the lack of demand for credit.

Fiscal Outcome

The underlying cash balance for 2020/21 is estimated at $214bn (or around 11% of GDP) after a deficit of $85bn in 2019/20. The deficit is expected to start to narrow from 2021-22 onwards, but is expected to remain well in deficit right through the forward estimates period and beyond.

Economic Outlook

Fundamentally we are much more worried about the outlook than the forecasts published by the Treasury. We see GDP falling by around -2.1% in 2020/21 (while the Treasury is at -1.5%). For 2021/22 we have around 3.8% but the Treasury has 4.7%. While we both see unemployment peaking at around 8% (Treasury in December 2020, NAB March 2021) the Treasury has unemployment falling to around 61⁄2% in 2021/22 while NAB is nearer 7%. We both have unemployment of around 6% in 2022/23.Generally, we are weaker across all private sector components, while we are stronger on the outlook for government spending. We also expect a slower bounce back in exports.

Financial Markets

There was little to no market impact as the bottom line was close to expectations. S&P has confirmed its negative outlook on Australia’s AAA rating, the AAA rating is contingent on deficits narrowing from fiscal 2022 onwards. Moody’s and Fitch have reserved judgment for now.

For further details, please see the 2020 Federal Budget Economic Commentary