Economy

The 2020 Federal Budget Will Drag the Horses to Water, but Will They Drink?

Dr Marcus Smith

On Tuesday this week the Federal Treasurer, Josh Frydenberg delivered his second budget as the nation continues to navigate the COVID-19 crisis while traipsing through its greatest recession since the Second World War.
With Australia’s economy contracting by 7% in the June quarter this year, the numbers are ugly no matter which angle you look at them.

The Commonwealth Government’s underlying cash balance this year is expected to record a deficit of $213.7 billion in 2020-21, which is around 11% of Australia’s gross economic output. This is, of course, a stark write-down of the $7.1 billion surplus announced in the 2019-20 budget.

The recovery to the national cash balance is earmarked to be more than a decade out, with trailing deficits over the estimates forecast to be $66.9 billion in 2023-24 and $49.5 billion or 1.6% of GDP in 2030-31.

Amidst record spending, record deficits and Australian Government debt soaring past $1 trillion, the Treasurer intrepidly hailed the 2020-21 Budget as “the right budget at the right time”.

At this time few could argue with fiscal policy being the appropriate expansionary policy tool given that the Reserve Bank of Australia’s (RBA) cash rate target is 0.25% and the floor of its collar on the overnight cash market sitting at just 10 basis points on credits paid on exchange settlement funds of bank’s balances held with the RBA.

The RBA have little room to move on monetary policy, which tends to be a blunt instrument with long lags to take effect in the economy.

Accordingly, with the winding down of provisional response programs such as JobKeeper and JobSeeker, the Government announced the next stage as its recovery plan to be implemented through its $74 billion JobMaker initiative, which takes the Government’s overall COVID-19 response and recovery support to be $507 billion since the onset of the pandemic.

Key elements of the JobMaker Plan include:

• $50 billion in tax relief to households and businesses over the forward estimates to create jobs, including $17.8 billion in personal tax relief, $26.7 billion for instant asset write-offs, and $4.9 billion for a temporary loss carry-back provision; 
• increasing the Government’s infrastructure investment pipeline by $10 billion to $110 billion over ten years;
• $4 billion for a JobMaker Hiring Credit to give businesses incentives to take on additional employees that are aged 16 to 35 years old;
• $1.2 billion to support 100,000 new apprentices and trainees with a 50 per cent wage subsidy;
• $240.4 million through the Women’s Economic Security Statement;
• $1.6 billion for 23,000 additional home care packages;
• $798.8 million for the National Disability Insurance Agency and NDIS Quality and Safeguards Commission; and,
• $550 million for a package supporting regional Australia.

Yet, while the Government are indeed ‘throwing the kitchen sink’ at the COVID-19 crisis to stimulate the Australian economy, the idiom comes to mind that “you can take a horse to water, but you can’t make it drink”.

The success of this recovery plan will be invariably determined by the extent to which businesses will be confident to access the support provisions and invest in new plant and machinery as well as hire new staff in a time of such uncertainty.

Leading Queensland economist, Gene Tunney from Adept Economics also provided commentary on this issue in his initial response to the Federal Budget published on the Queensland Economy Watch blog:
“The substantial temporary expansion of the instant asset write-off, which we learned about tonight, will hopefully stimulate some much-needed additional business investment, although how much remains to be seen. Even with the additional incentive, many businesses are probably reluctant to invest given the uncertain economic outlook … JobMaker is another program that may not live up to expectations for the same reason. I also suspect that JobMaker may end up subsidising the wages of apprentices and trainees who would have been taken on anyway, and hence its “additionality”, to use the jargon, would be small.”

Indeed, the Government has made some rather optimistic assumptions on a sharp recovery to economic growth across the budget forecasts, which is largely dependent on a vaccine being found, the reopening of state borders, and unemployment falling to pre-COVID levels below 6% over the estimates.

While the deterioration in the Commonwealth Treasury bottom line has meant that gross debt over the estimates is forecast to balloon to over $1.1 billion in 2023-24, the Treasurer has rested his laurels on the two impulses of increasing debt and falling interest rates having implied negligible effect on interest costs as governments increase borrowing for the moment.

Nevertheless, the level of national and state debt and whether these levels are sustainable is an issue that will need to be addressed at some time in the future, particularly when faced with a future global financial and or economic crisis.