A lot can change in a year.
In May 2020, 12 months ago, the first instalment of JobKeeper had just been paid. JobKeeper, a wage subsidy paid by the Federal Government to businesses significantly impacted by COVID-19, would go on to be the largest single fiscal initiative in Australia’s history.
Although we had just emerged from the first wave of COVID-19 infections better than some of our international peers, the economic outlook in May last year was decidedly bleak. Reputable commentators — Treasury included — warned of an unprecedented economic recession, with unemployment potentially reaching 15 per cent.
Fast-forward to today, and in the words of Treasurer Josh Frydenberg, delivering his third budget, “Australia is coming back”.
On virtually any measure of economic performance, Australia’s economy has demonstrated remarkable resilience. The economy contracted only 0.2 per cent last year, outperforming all other major developed economies, translating to far more benign labour market impacts than expected. After increasing to 6.9 per cent in 2019-20, unemployment is expected to fall to 5.5 per cent this financial year and to 4.5 per cent by the end of the forward estimates.
Good management or good luck? The latter certainly has played a part. For instance, the Budget has benefited from iron ore prices which are now more than four times the level Treasury projected in 2020. But as the saying goes, sometimes you need to make your own luck. Australia’s economic recovery owes much to both the speed and scale of the measures introduced by the Government last year, in both managing the COVID-19 health crisis and the associated economic fall-out.
Tallying up the bill is, however, a sobering task. The total cost of the Government’s COVID-19 economic support package is now nearly $300 billion. The Budget’s underlying cash balance for 2020-21 is expected to be a deficit of $161 billion.
Budget repair remains very much a medium-term challenge. The Government’s immediate focus is on expenditure measures targeting a range of social and economic challenges — from aged care, mental health, child care, training and skilling, community resilience, and the perennial budget priorities of infrastructure and defence.
So, where are the risks? The effectiveness of Australia and the world’s management of COVID-19 remains critical. In only October last year, Treasury projected border restrictions broadly would ease by the end of that year, with international students and tourism to gradually recover by late 2021. Those optimistic projections have had to be recalibrated to the gradual arrival of international tourists, students and migrants over 2022.
Beyond that, Australia needs to regain its growth mojo as quickly as it can. Growing the economy is the key to both budget restoration and funding the structural expenditure programs the community values. With a bit more luck (and good management), Australia can build on the reforms announced in the Budget, and look to re-engage in the future on the unfinished business of reforms like fundamentally reshaping our tax system for the next decade and beyond.
Chief Economist, Jeremy Thorpe touches on the highlights of this year’s Budget including infrastructure, childcare, aged care and building both environment and personal resilience.
Health Lead Partner, Sarah Butler, delves into the reassuring allocations we’ve seen for aged care, mental health, and supply chain resilience.
Tax Partner, Ellen Thomas speaks through the key tax elements of the Budget: support for innovation including the patent box regime, attracting and retaining talent and extending the instant asset write-off.