The Australian Federal Budget 2021/22 aims to sustain the faster-than-expected progress in the economic recovery from the pandemic crisis by extending fiscal stimulus to support a return to full employment. A stronger fiscal position with the economy rebounding sharply and commodity prices staying at elevated levels has provided the scope for additional stimulus to flow, including a further $21.5bn in new measures since the December Mid-Year update, ramping up in scale over the next couple of financial years. The key priorities are around increasing skills and participation in the labour force, extending incentives for firms to hire and invest, providing ongoing tax relief for low- and middle-income workers, and lifting spending on essential services. Since the onset of the pandemic, the Government's economic support measures total $291bn (14.7% of GDP) of announcements, with $186bn of this frontloaded to the period up to the end of the current financial year.
Federal Budget 2021/22 | Budget Position
Progress in Australia's economic recovery from the pandemic crisis has occurred more rapidly than earlier expected by Treasury and commodity prices have continued to trade at elevated prices for longer than anticipated. These factors have led to the budget deficit for the current financial year (2020/21) being lowered sharply to $161bn (7.8% of GDP) from $197.7bn (9.9% of GDP) at the time of the December MYEFO update. However, reflecting the intent of the Government to provide continuing fiscal stimulus to support a return to full employment, the projected deficit for 2021/22 was little changed at $106.6bn (5.0% of GDP) from $108.5bn, while the deficits for the out-years are now larger. In 2022/23 the deficit is forecast to be $99.3bn (from $88.4bn previously); $79.5bn in 2023/24 (from $66.0bn); and $57.0bn in 2024/25 (from $55.2bn).
Budget reconciliations
The effects of the faster-than-expected progress in the recovery and new policy measures in the period since the December MYEFO are summarised in the table above. On Budget night, Treasurer Frydenberg announced a new spending package of $21.5bn, with $3.3bn of this coming through in the remainder of the current financial year and $18.2bn in 2021/22. Combined with the new spending measures planned in the out-years, a total of $95.8bn in policy stimulus (around 4.3% of GDP) was included in Budget 2021/22. This will be funded by $68.3bn in new payments, while the tax-take is lowered by $27.6bn to make up the balance.
The stronger economy has boosted the budget significantly, with the effect of parameter changes adding $104.3bn over the forward estimates. There is a $40.1bn boost for the remainder of the current financial year alone, mainly reflecting the tailwinds from elevated iron ore prices with the commodity currently trading above US$200/t on global exchanges. Overall, the cumulative boost to the Budget from the stronger economy is slightly larger than the cost of new stimulus, resulting in the projection for total deficits through to 2024/25 declining to $503.3bn from $511.7bn expected at the time of the December MYEFO.
Government debt
Government net debt tracks a lower profile than was expected in the previous Budget and then in the December update, due to smaller deficits and higher bond yields (which reduce the market value of debt securities) emanating from the global reflation trade. Net debt lifted from its pre-pandemic level of 19.1% to 24.7% of GDP in 2019/20. It is now expected to increase to 30% of GDP in 2020/21 compared to 34.5% forecast back in December. In 2021/22 net debt rises to 34.2% of GDP, down from 39.3% previously. The profile for the remaining years is lower than in MYEFO, though the scale of improvement moderates to 40.9% of GDP by 2024/25 from 42.6% forecast last December. By global standards, the size of the debt is relatively and the cost servicing the debt remains very low at 0.7% of GDP over the forward estimates. Following the budget announcements, the AOFM released its issuance update, with total issuance of $130bn expected to be required in 2021/22. While this is larger than markets had expected, the weekly requirement of around $2.0-2.5bn is lower than the current pace of RBA bond purchases in the secondary market ($4bn/wk).
Federal Budget 2021/22 | Payments and Receipts
Payments as a share of GDP are forecast to peak at 32.1% in the current financial year, up sharply from its pre-pandemic level of 24.5% reflecting the scale of support that has been provided to the economy. In 2021/22, payments lower to 27.6% of GDP before moderating thereafter to 26.2% by 2024/25.
Government receipts as a share of GDP in 2020/21 have been revised higher since MYEFO, rising from 23.6% to 24.3% as a result of the stronger-than-expected economy. In line with the measures in this Budget, receipts lower to 22.6% of GDP in 2021/22 and are broadly unchanged the year after. By 2023/24, receipts begin lifting again to 23.4% of GDP and 23.9% in 2024/25. Receipts pre-pandemic were 24.9% of GDP.
Federal Budget 2021/22 | Policy Measures
Major measures announced in Budget 2021/22 are summarised in the table below. Key announcements support employment and strengthen the quality and availability of essential services.
New payments announced since MYEFO cost the budget $18.2bn in 2021/22 and $64.9bn for the 4 years. Major announcements were;
- $9.5bn has been allocated to support Australians looking for work, factoring in the $50 per fortnight increase to the base rate of working-age payments (including JobSeeker, Youth Allowance and Austudy) that became effective as of April 1. Additionally, eligibility for certain payments includes an income-free area, with this threshold rising to $150 per fortnight from $106 for single JobSeeker recipients.
- Age care received a $17.7bn package in response to the findings of the Royal Commission into the sector. There is $7.8bn is directed towards improving existing services, and $7.5bn for an additional 80,000 Home Care packages.
- Infrastructure received a further $15.2bn over the next 10 years for road, rail and community projects across the nation. New commitments for the states are as follows: New South Wales $3.8bn, Victoria $3.4bn, South Australia $3.4bn, Queensland $2bn, Western Australia $1.6bn and Tasmania $0.4bn.
- A COVID-19 package of $3.4bn was announced, which includes $1.9bn to expand access to vaccines, and $1.2bn for the subsidy of domestic airfares to tourism regions.
- Skills and training was granted $2.7bn of funding to uncap and extend the Government's wage subsidy scheme for new apprentices and trainees. This is expected to add an additional 170,000 apprentices and trainees (beyond the existing 100,000) by the end of March 2022.
- A $2.3bn health package, with the bulk of this ($2bn) going towards expanding access to and availability of mental health services.
- Child care received a $1.7bn package that will further reduce out-of-pocket costs for families for second and subsequent children through increases to the Child Care Subsidy.
- For housing, the construction commencement requirement under the HomeBuilder scheme has been extended for all existing applicants from 6 months to 18 months at a cost of $0.8bn. Another 10,000 places have been advanced under the New Home Guarantees policy for 2021/22, enabling first home buyers to build a new home (or purchase a newly built home) with a deposit of as little as 5%. Meanwhile, under the First Home Super Saver scheme, eligible first home buyers can now access a maximum of $50,000 (up from $30,000) from their superannuation to enter the market.
On the receipts side, policy changes lead to a reduction in the tax-take of $27.6bn over the 4 years. Major announcements were;
- A 12-month extension of the temporary full expensing measure through to 30 June 2023 under the Government's JobMaker plan at a cost of $17.5bn. This allows firms with an annual turnover of less than $5bn to immediately deduct the full cost of depreciable assets (unlimited in value and number) acquired after October 6 2020.
- The temporary loss carry-back provision has been extended by 12 months through to 30 June 2023, costing the budget $2.8bn. Under the extension, firms will now have until the 2022/23 financial year to carry-back tax losses against profits booked as far back as 2018/19.
- Tax relief is provided through the retention of the low and middle income tax offset for the 2021/22 financial year. The measure reduces the tax-take by $7.8bn over the forward estimates. For another 12 months, a maximum tax offset of $1,080 will be available for taxpayers with taxable incomes between $48,000-$90,000, phasing out to zero at $126,000. Taxable incomes of $37,000 or less receive a $255 tax offset. For incomes between $37,000-$48,000, the base $255 offset increases by 7.5 cents per dollar until the maximum $1,080 offset is reached.
Federal Budget 2021/22 | Economic Outlook
Reflecting the economy making faster-than-expected progress in rebounding from the pandemic crisis, the forecasts in the Budget have been upgraded since the December MYEFO. Real GDP growth for 2020/21 is now expected to be 1.25% (from 0.75%) and then a very strong 4.25% in 2021/22 (from 3.5%). Contributing to the boost is the assumption of the vaccine being rolled out nationally by the end of the year, though on the other hand the outlook is weighed by the international borders remaining closed until at least mid-2022. Net overseas migration was 194,000 in 2019/20 but is projected by Treasury to contract by 97,000 in 2020/21 and fall by a further 77,000 in 2021/22.
The Government's direct economic support measures since the onset of the pandemic stand at around $186bn (9.4% of GDP), and in conjunction with the monetary stimulus from the RBA with rates at the zero lower bound and large-scale bond purchases, domestic demand is expected to continue to drive the recovery. The outlook for household consumption growth has lifted to 1.25% in 2020/21 and to 5.5% in 2021/22, with spending remaining robust supported by accumulated savings and an improving labour market. The withdrawal of the JobKeeper wage subsidy is not expected to derail the recovery in the labour market. The outlook for the unemployment rate has been revised sharply lower, falling to 4.5% by 2023-24 from 5.25% previously. However, the outlook for wages growth, despite modest upward revisions, is still very subdued.
Residential construction activity is forecast to rise by 2.5% in 2020/21 and then flatline in 2021/22 before starting to roll over in 2022/23 (-1.5), suggesting that policy support from the HomeBuilder scheme will frontload demand. The extension in this Budget to temporary full expensing is expected to significantly boost non-mining business investment, with the Government looking to capitalise on the current strength in surveyed measures of business conditions and confidence. In 2020/21, non-mining business investment contracts by 6.5% before rising by 1.5% in 2021/22 ahead of a 12.5% surge in 2022/23.
With commodity prices more elevated than previously assumed, the outlook for the terms of trade has jumped to expected growth of 10% in 2020/21 from just 0.75% forecast in December. This boosts nominal GDP growth to 3.75% in the current financial year from 1% previously. However, Treasury's assumption is that the iron ore price falls to US$55/t by the end of Q1 next year, resulting in a pullback in the terms of trade (-8.0%), slowing national income growth to 3.5%.
Assisting the robust outlook in Australia is a global economic recovery that is now expected to be faster than at the time of the December MYEFO. Global GDP growth has been revised up to 6.0% in 2021 from 4.75% previously, and in 2022 growth was lifted by 0.75ppt to 4.5%. A more rapid expansion in China and a significant upward revision to growth prospects in the US following unprecedented levels of fiscal stimulus are the key factors.
Federal Budget 2021/22 | Summary
The Australian Federal Budget for 2021/22 highlighted a significantly improved fiscal position reflecting the economic recovery achieving faster-than-expected progress and commodity prices staying elevated above earlier forecasts. But with the focus on keeping fiscal stimulus flowing to support a return to full employment, new measures in the Budget add a further $21.5bn between the remainder of the current financial year and 2021/22.
