2021 Federal Budget: NAB Economic Commentary

The Treasurer wasn’t kidding when he said budget repair has been put on hold until unemployment was below 5%, with a raft of new spending measures in Federal Budget 2021.

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Commentary

The Treasurer wasn’t kidding when he said budget repair has been put on hold till unemployment was below 5%, with a raft of new spending measures offsetting the cyclical improvements in the budget due to a better than expected economic outcome (See chart on Policy and Parameters in the Key metrics section). Overall, the momentum of the recovery has more than offset the pullback in stimulus but this budget aims to provide further support.

In terms of spending the largest item was the aged care package – at around $17.7bn over the forward estimates. But there were other big spends in the areas of Infrastructure ($15bn) and NDIS ($13.2bn). The Low – and Middle-Income tax offset was extended a year ($7.8bn) and the Investment Asset Write Off also was extended. Other areas of focus included childcare, home ownership support and a number of tweaks to superannuation to ensure greater flexibility (as well as support for women).

Something of a surprise was relatively little to boost private sector investment which will be critical to maintain the recovery’s momentum. Also there was not a lot of emphasis on public housing and no attempt to bring forward the third phase of tax cuts (which will be much cheaper than first thought given the better labour market outcomes forecast) or company tax changes. It is worth noting that the Budget does not include election spending which will either occur via an early Budget (the election must be called by May 2022) or via Government announcements.

The size of the total fiscal package can be seen from our analysis of the Structural Budget impulse using OECD methodology. That suggests that structurally the Budget is taking back only around 2% of GDP in policy stimulus – compared to a net 8% stimulus in 2019/20 and 2020/21. Clearly a structural surplus is a long way off (See our Section on the Fiscal Stimulus).

In looking at the near-term trends, the fiscal situation is once again driven by the expense side rather than revenue. Indeed, compared to MYEFO there is little change. See Fiscal Stimulus section.
Overall, we have no problem with the focus on maintaining the support for economic growth but we see the scope for more structural / productivity enhancing measures to have been included. Cutting red tape, tax changes and greater support for alternative energy environment would have been preferred. That said, as noted above, we are only getting a partial view of the likely budget outlook and much can and will probably change in the lead up to the election.

Fiscal Outcome

The underlying cash balance for 2020/21 is estimated at $161bn (or around 8% of GDP), around $40bn better than at MYEFO. While for 2021/22 a deficit of $107bn is forecast (we had expected around $75bn), after that progress is slow and by 2023/24 the deficit is still expected to be around $79.5bn. A return to surplus looks many years away.

Economic Outlook

Both we and the Treasury see the economy continuing to recover over the next couple of years. In aggregate our outlook for real GDP sees a similar end point over the forward estimates but there are some underlying differences. We see a bigger boost to business investment in the near term and a more pronounced cycle in dwelling investment, while Treasury sees stronger consumption and a bigger contribution from net exports. On the labour market we are more optimistic with unemployment around 0.5ppt lower than the budget outlook by the end of the forecast horizon. That said, both sets of forecasts embody a weak outlook for wage growth, which will see soft inflationary pressure and the need for ongoing support from policy makers. Our forecasts are based on much the same assumptions for a reopening in borders next year and the possibility of further small outbreaks of the virus but no large scale shutdowns.

Financial Markets

S&P maintained its negative outlook for Australia’s AAA credit rating, noting that “risks remain tilted toward the downside”. S&P has said before that a narrowing in the deficit towards 3% of GDP is more consistent with a AAA rating (not projected till 2024-25 in the budget).

For further details, please see the Federal Budget 2021: Economic Commentary