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Economic Overview

 

The 2020/21 Budget represents an unprecedented effort by the Federal government to steer the economy out of COVID-19 induced recession in a period where monetary policy is near the limit of its efficacy. Fiscal policy has taken centre stage and with government finances in a healthy position before the crisis, a record deficit has been announced that prioritised expenditure for job creation as a central pillar to restore spending and confidence across the household and corporate sectors. This strategy has seen the government: 

 

  • Bring forward Stage 2 of the Personal Income Tax Plan from 2022-23 to 2020-21 which is estimated to deliver $17.8 billion in additional tax relief. 
  • Support business investment through temporary full expensing of depreciable assets worth $26.7 billion and $4.9 billion for temporary loss carry-back. 
  • Provide young Australians through JobMaker Hiring Credit to access job opportunities and to retrain for skills, worth $4 billion. 
  • Accelerate publicly funded infrastructure commitments since the onset of the pandemic worth around $14 billion. 
  • Maintain the Jobkeeper payment until 28 March 2021, estimated to be worth $101.3 billion over 2019-20 and 2020-21. 
Federal Budget

     

Total government receipts are projected to fall to 23.8% of GDP over 2020-21 and government payments are projected to rise to 34.8% of GDP over 2020-21 (chart 1). 

 

Chart 1: Australian Government Receipts and Payments

 

Source: Commonwealth government, Mercer

     

Rising expenditures and falling incomes have resulted in an underlying cash deficit of $213.7 billion, equivalent to 11% of GDP (chart 2). While this deficit is large by historical standards, the measures announced by the Australian government remain broadly in line with stimulus programs announced across other major developed economies. 

 

Chart 2: Underlying Cash Balance

 

Source: Commonwealth government, Mercer

     

To finance these additional expenditures, net debt is expected to rise to around $700 billion, equivalent to 36.1% of GDP (chart 3) by June 2021 and is expected to peak at 43.8% in 2023-24. While additional borrowings will push up the government’s debt ratio, the size of Australian government debt remains low across Organisation for Economic Co-operation and Development (OECD) nations. Rising government expenditures to combat the economic fallout from COVID-19 is sensible and this is unlikely to affect Australia’s AAA credit rating over the medium term as long as economic growth improves and the government exercises prudence in public finances. Higher debt levels will result in rising interest repayments, however, with interest rates at record lows across the yield curve and the RBA expected to keep policy anchored to near zero percent over the near term, these additional commitments seem manageable. 

 

Chart 3: Australian Government Net Debt

 

Source: Commonwealth government, Mercer

     

From here, Treasury expects real economic growth to pick up to 4.25% in 2021 from an expected decline of 3.75% in 2020. The unemployment rate is expected to peak at 8% before declining towards 6.5% through June 2022 which remains well above pre-COVID-19 levels. The journey back towards full employment remains challenging due to structural change brought forward by the pandemic, which may result in more permanent job losses. The external sector unlike during the Global Financial Crisis in 2008 is becoming less accommodative due to rising protectionism and tensions across global trade. Population growth, both through natural increase and net migration, is also likely to be less supportive for economic growth ahead.

 

While the measures announced by the government have delivered on increasing household income, it remains to be seen if household spending will rise as the pandemic has pushed the household savings ratio to a 40-year high (chart 4). Household balance sheets were highly leveraged going into the crisis and additional household disposable income could be prioritised for debt reduction over spending. Our expectation for the government’s policy mix from here would be to tilt away from income support in favour of investment to directly drive up the capital expenditure cycle. The government has announced $14 billion in additional infrastructure building initiatives since the start of the pandemic, which is a step in the right direction with state budgets likely to echo similar initiatives when released later this year. 

 

Chart 4: Australian Household Savings Rate

 

Source: ABS, Mercer

     

In an uncertain environment, the government will look to be nimble in its policy response and to recalibrate as needed to deal with shifting conditions. There may well be further spending commitments down the track once mortgage deferrals end, early superannuation withdrawals cease and Jobkeeper/Jobseeker payments diminish which will contribute to lower household incomes. Therefore, fiscal policy settings are likely to remain accommodative and loose as long as necessary to drive meaningful improvement across the labour market and to support the recovery in household incomes and spending. The road to surplus will likely be far off into the future.  

 

 

 

 

 

 

This content is intended to inform clients of Mercer’s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client’s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This content has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN 55 153 168 140, Australian Financial Services Licence #411770. Any advice contained in this content is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. ‘MERCER’ is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.

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