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Economic Overview

The 2021-22 Federal budget builds on the measures announced last year to aid economic growth and full employment post the pandemic induced recession. This year’s budget will see aggregate expenditure of $588.7 billion against receipts of $482.1 billion with continued fiscal expansion supporting Australia’s ongoing economic recovery. The main initiatives are: 
 

  • $7.8 billion to extend tax relief to around 10.2 million low- and middle-income earners.
  • $20.7 billion in tax relief through extending temporary full expensing and temporary loss carry-back.
  • $15.2 billion in new commitments to infrastructure projects across Australia.
  • $17.7 billion to transform the aged care system to ensure older Australians are treated with respect, care and dignity.
  • $13.2 billion for the National Disability Insurance Scheme.

Total government receipts are projected to reach $482.1 billion or 22.6% of GDP over 2021-22 which is expected to recover to 23.9% of GDP by 2024-25. Government payments have fallen to $588.7 billion in 2021-22 but are expected to remain elevated at around 27% of GDP over the next three years to support the economy’s normalisation. 

Federal Budget

     

Chart 1: Australian Government Receipts and Payments

 

Source: Commonwealth government, Mercer

     

The underlying cash deficit for 2021-22 is anticipated to reach $106.6 billion, equivalent to 5.0% of GDP (chart 2). Last year’s deficit was revised down by $52.7 billion on stronger tax receipts. This year’s deficit spending remains significant and government support remains vital to sustain the economic recovery. 

 

Chart 2: Underlying Cash Balance

 

Source: Commonwealth government, Mercer

     

The government has financed increased fiscal commitments through debt. Net debt is projected to rise to around $729.0 billion, equivalent to 34.2% of GDP (chart 3) to June 2022 which is set to peak at $980.6 billion or 40.9% of GDP by 2024-25.  

 

Chart 3: Australian Government Net Debt

 

Source: Commonwealth government, Mercer

     

Additional government borrowings during the pandemic have pushed up the government’s debt ratio but Australia remains in a strong position as government debt was low to begin with. Even with these increased commitments, Australian government debt remains low across OECD nations as other countries also relied on debt financed spending. Mercer does not expect to see higher debt levels impact Australia’s credit rating over the medium term as long as the government exercises prudence in public finances. Mercer does not expect immediate changes in fiscal policy settings through austerity or other means but gradual steps to balance the budget over the forward horizon appear sensible. Bond yields remain anchored near cycle lows with incremental interest repayment from higher debt levels manageable in this environment. Mercer expects monetary policy to remain dovish and for short term interest rates to remain close to the zero lower bound which will result in coordinated policy support in this extraordinary period.  


Outlook
 

Australian economic growth is expected to expand further in 2021 and 2022, largely due to favourable domestic policy settings and strong global conditions. Treasury expects real growth in the economy to pick up to 4.25% over fiscal year 2021 which is in line with Mercer’s forecast of 4.7% for end 2021. Much of this growth is expected to come from higher household consumption, dwelling investment, government spending and rising business investment. The outlook for the external sector remains unclear as international borders remain closed which represents a headwind for tourism and education. Ongoing trade tensions with China are beginning to feed back into production with growth into new markets yet to provide meaningful offset. On the positive side, rising terms of trade has provided a strong boost for fiscal revenues as iron ore prices return to near record highs. The government is committed towards reopening by investing $1.9 billion through the COVID-19 vaccination strategy and $1.5 billion to extend a range of pandemic related health measures which could lead to a reopening in borders by the end of 2022 if not sooner. 
 

The labour market has recovered strongly over the first four months of 2021 with the unemployment rate falling back to 5.6% and we expect to see further improvement. Treasury expects unemployment to fall further to 5.0% in fiscal year 2021 and 4.75% in fiscal year 2022. Mercer expects full employment will be a top policy priority for both the government and the Reserve Bank of Australia and expects unemployment to fall further this year to sub 5.0%. Despite this likely improvement, full employment may still take a number of years to realise especially when international borders remain closed. This will mean policy settings are likely to be accommodative for an extended period until full employment is achieved and we estimate the economy can run harder without significant inflationary pressure. 

 

Chart 4: Australian labour market

 

Source: Commonwealth government, Mercer

     

The budget remains friendly for households as the government prepares for next year’s election. Low and middle-income earners will benefit from further taxation relief which will provide assistance for around 10.2 million individuals. First home-buyers will gain from an extension of the first home loan deposit scheme, along with an increase to the first home super saver scheme. Families with children will be provided with assistance through more affordable childcare which will help alleviate costs of living. 

 

Firms are also set to benefit from the budget through favourable tax policy and targeted assistance. Currently business optimism is strong as capacity utilisation reached a new high. This improved outlook is favourable for business investment, which Mercer expects will pick up steadily this year and next year. This year’s budget has reflected a shift towards boosting investment which will come from both private and public sectors. The extension of full expensing for depreciating assets to June 2023 is likely to support further business spending on an improved outlook. Selected industries including health care and age care will benefit from additional spending commitments that are worth $17.7 billion over five years. The government has announced a further increase of $15.2 billion over ten years as part of the national infrastructure pipeline for roads and highways which will be positive for the economy’s long term productivity. The digital economic strategy is a step in the right direction for Australia to encourage advance manufacturing but more is likely needed to foster a long-term plan. 

 

Overall, Mercer expects fiscal policy settings will be accommodative over the next few years to 2024 as the economic recovery builds further traction. This will mean strict austerity measures and tax hikes will be pushed out over the near term with the government likely to keep spending initiatives that are supportive for households, firms and public investment. However, once the economy is on more solid footing from 2024 onwards budget repair measures will return into the policy mix. This may include a combination of repair levies, taxes and other legislative changes. Mercer expects these measures will be introduced gradually and spread over a sufficiently long period but nevertheless will represent modest tightening. The road back to surplus will be very protracted. 

 

 

 

 

 

 

 

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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