Budget 2020 - Economic and Fiscal Implications

By

Paul Ashworth, Managing Partner
David Clark, Director


Posted 07 October 20

Unconstrained by an ideological need to balance the budget of the cycle, the Morrison Government has unleashed the Godzilla of all budget deficits, with FY2021 forecast to exceed $210 billion (11% of GDP). The blowout is a combination of a fall in government receipts (~$60 billion), the forward dating of tax cuts, and a dramatic increase in the level of government spending (~$166 billion), the bulk of which is going to the $102 billion JobKeeper program. The result is a Budget that has something for just about everyone, with almost no one losing out.

There has been little disagreement between mainstream political and economic commentators about the need for this unprecedented fiscal stimulus – particularly given the second wave of COVID-19 that has engulfed Victoria in draconian lockdowns – but questions will be raised over how the money is to be spent and whether it delivers bang for buck.

In our opinion, the success of this Budget will be judged on two criteria:

  • First, the avoidance of a rise in the number of long-term unemployed workers, and
  • Second, a return to pre-crisis growth rates through improved economic productivity.

Both will be essential to Australia’s long-term economic prosperity and the Government’s ability to repair the Budget.

Construction; Coming to a Street Near You

As foreshadowed over the past week, the Budget commits an extra $14 billion in new and accelerated infrastructure spending on top of the significant $110 billion infrastructure pipeline announced last year. The focus of this additional funding is to bring forward the start dates of shovel-ready projects, as this will have the greatest impact on job creation. To emphasise this point, the funding is on a ‘use it or lose it basis’, with any unused funding able to be allocated to another State or Territory.

What Happened to the ‘Snap-Back’?

The immediate ‘snap-back’ of government support, principally the JobKeeper package, that was outlined by Morrison during the initial months of the pandemic will not occur. This is due to the second round of lockdowns in Victoria and subsequent border closures that hampered the return to business-as-normal and made it impossible to remove the JobKeeper package completely. It is also a reflection of a recent phenomenon of Australian politics, that it is far easier to give than it is to take-away. Since the GFC, we have witnessed the inability of successive government to rein in spending, and the post COVID-19 recovery looks to be no different.

To be fair, the structural budget deficit will narrow sharply in FY2022 (Figure 1) as most of the support measures that were provided in the pandemic will have run their course. However, government spending is expected to accelerate to 4.2% p.a. over the next four years. Relative to GDP, spending will be at 27% by 2023/24, significantly above the 25% in the decade before, which will result in net debt rising to just shy of $1 trillion in 2023/24 and a budget deficit that is still larger than the peak of the Rudd stimulus in 2009.

Diagram showing

Who Will Foot the Bill?

No one… yet. The reduction in interest rates leading into and during the pandemic has seen the cost of government debt plummet, with 10-year bond yields falling from 2.85% in 2018 to a current rate of 0.85%. The result is that, despite the huge increase in government debt, the net amount of interest paid will be lower in 2023/24 (0.6% of GDP) than it is now. Of course, this does not account for the eventual repayment of principal, which will continue to accumulate over the next decade.

In the aftermath of the GFC, many developed economies attempted to implement austerity measures to paydown debt levels; this was generally met with resistance from voters (see Grexit) and unlikely to be politically palatable here in Australia. We expect to see a shifting in the deficit narrative from targeting a balanced budget to debt growth below trend growth (i.e. constant debt to GDP). Ultimately, the implicit assumption in this Budget is that fiscal spending will drive improved productivity and economic growth, which will reduce debt via higher inflation.

Budget 2020

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