Australia: Decade of budget deficits ahead as government spends billions to recover pandemic-hit economy
The Treasurer has declared Australia’s economic engine is “roaring back to life” as he unveiled tens of billions in new spending in a budget that could be the Coalition’s last before a federal election.
Key points:
- The deficit this financial year is expected to be $161 billion, falling to $106 billion in 2021-22
- The government has forecasted an unemployment rate of 4.5 per cent in 2023-24 and 2024-25
- The centrepiece is $17.7 billion for the aged care sector
The government is pitching its second pandemic budget as solely focused on Australia’s recovery from the COVID-19 pandemic and recession.
That will see a decade of deficits and debt that’s set to peak at almost $1 trillion in 2025.
In its bid to drive jobs growth, the government is targeting areas where there are skills shortages, like child and aged care.
“The economy is coming back. Australia is coming back,” Treasurer Josh Frydenberg said.
Spending on the nation’s most vulnerable
The bulk of new government spending goes to the nation’s most vulnerable — children, the elderly and people with a disability — all sectors the government has faced criticism for failing to do enough to support.
The centrepiece of the budget is $17.7 billion for the aged care sector, announced along with the government’s response to the Aged Care Royal Commission, which unearthed years of neglect and abuse.
The government hopes the backlog of people wanting home care packages will be cleared with an extra 80,000 additional packages created within two years.
Aged care residents will also have to receive 3 hours 20 minutes of care each day by 2023.
There’s money for training aged care workers and incentives to encourage people to stay in the industry.
That pitch to drive jobs extends to the childcare sector, which will receive an extra $1.7 billion over the next three years.
It will also offer additional subsidies for families with two or more children if they are in care at the same time.
The Government estimates it will help around 250,000 families, on average, around $2,200.
That childcare spend is central in the Government’s first women’s budget statement, and accounts for half of its $3.4 billion pledge to improve women’s safety, economic security and health and wellbeing.
The Coalition hopes its policies for women will help counter criticism it has faced in recent months for failing to address women’s inequality.
The government hopes that helping with childcare expenses will encourage more women into work, which could boost their spending in the short term, while ensuring they have better superannuation balances when they retire.
The budget also includes $2.3 billion for mental health support and treatment.
The government has picked out successes that targeted businesses in the last budget and is extending them.
Business tax incentives will be extended, while the JobTrainer program will receive another $500 million, subject to states and territories matching that funding.
It will also offer another boost to its apprentice support scheme.
The underperforming JobMaker Hiring Credit, a youth wage subsidy announced in last year’s budget, will stay in place but is only expected to generate up to 10,000 jobs over the next two years, having initially forecasted it would produce 450,000 jobs.
Tax cuts for low-middle income earners
There had been calls for the government to bring forward the controversial, but legislated, third stage of its income tax cuts, which is due to come into effect 2024-25.
The Coalition has resisted that but has extended a tax offset for low- and middle-income earners for another year, costing the government almost $8 billion.
“This is a stimulus measure because we’re not out of the pandemic yet,” Mr Frydenberg said.
Money for onshore vaccine manufacturing
Finance Minister Simon Birmingham confirmed the government was working on plans to manufacture mRNA vaccines in Australia.
Australia’s lack of an mRNA laboratory has been highlighted in the pandemic with the nation unable to manufacture the Pfizer COVID-19 vaccine.
That was further exacerbated when the government changed its advice for vaccinations, with anyone under 50 being recommended to receive the Pfizer vaccine because of fears of rare blood clots linked to the AstraZeneca vaccine, which Australia can produce onshore.
But the government has refused to detail the cost, insisting it was funded in the budget but the price withheld as officials continued to negotiate with the private sector.
Without an mRNA lab, Australia will have to continue to import Pfizer vaccines, and the likely booster shots people will have to receive in future years.
“We see this as being important for the long term,” Senator Birmingham said.
The broader budget includes an extra $1.9 billion for the vaccine rollout.
The budget also includes $3.8 billion in measures the government has funded but not yet announced publicly what they are.
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Economic recovery quicker than expected
The budget position has improved vastly in the past six months thanks to a quicker-than-expected economic recovery from Australia’s first recession in three decades.
The recovery has also been aided by soaring iron ore prices, a major Australian export to China, which are currently more than four times the value Treasury forecasted in the last budget.
The deficit this financial year is expected to be $161 billion, falling to $106 billion in 2021-22.
At the peak of the pandemic, Treasury feared unemployment would reach 15 per cent. It’s currently 5.6 per cent and the government expects it will fall below 5 per cent by the end of 2022.
The government has forecasted an unemployment rate of 4.5 per cent in 2023-24 and 2024-25, which it hopes will drive wage growth up more than 2 per cent year.
Debt set to hit $1 trillion
Forecasted debt and deficits are likely to cause unease in parts of the Coalition but the Treasurer has made it clear the focus won’t shift to cutting government spending until unemployment is at least below 5 per cent.
“We are in the middle of a pandemic. This is a pandemic budget,” he told the ABC.
The Treasurer hopes fewer unemployed people will both boost government coffers from higher income tax takings, while also reducing the need for welfare payments.
The budget is underpinned by a series of assumptions, including that the bulk of the population will be vaccinated by the end of the year and that international borders will remain closed until the middle of 2022.
“While the outlook is positive, considerable risks remain,” the budget warns.
“The continued economic recovery will rely on the effective containment of COVID-19 outbreaks both here and abroad and will be a key factor in the timing of the reopening of international borders, which could weigh on the outlook for the tourism and education sectors.
“Internationally, ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports.
“More broadly, downside risks to the outlook for the global economy from ongoing outbreaks of the virus in major economies, including India, could have implications for Australia’s domestic economy.”
Re-opening Australia’s international border
Senator Birmingham told the ABC he expected the border would be gradually opened, with a “small number of students” coming to Australia later this year.
The closure of the international border has the budget forecasting declines in net migration, which has been integral to growing Australia’s economy and preventing falling into a recession prior to the pandemic, this financial year and again in 2021-22.
“The weak outlook for population growth in the near term as a result of border closures will also weigh on the outlook for real GDP growth,” the budget states.
On the current projections, the budget forecasts that real GDP, which offers an indication of the health of the economy, is tipped for 1.25 per cent growth this financial year, after a 0.2 per cent decline in 2019-20.
Real GDP growth is then tipped to rise a further 4.25 per cent in 2021-22, before falling back to 2 per cent in each of the following three financial years.
ABC
