Federal Budget 2021: Spending in most of the right areas

Tonight’s Federal Budget delivered by Treasurer Josh Frydenberg contained few surprises.

As expected, there are forecast Budget deficits as far as they eye can see; albeit not as high as the October Budget predicted owing to the stronger than expected economic recovery and the iron ore mega-boom:

A decade of deficits?

The budget projects that the nation’s unemployment rate will fall to 4.5% by 2023-24, although curiously no real wage growth is projected until 2024-25:

Unemployment is forecast to fall to just 4.5%.

Real GDP is basically forecast to return to trend, despite much slower population growth. This suggests that per capita GDP will grow strongly:

Australia’s real GDP growth is projected to return to trend.

With Australia’s border closed to foreign workers, the labour market is also tightening. The ratio of unemployed people to vacancies is now at its lowest level in over a decade:

Without 180,000 to 200,000 migrant workers arriving every year, Australia’s labour market is tightening.

This explains why the budget forecasts the unemployment rate will fall to its lowest level since before the GFC, despite record high labour force participation:

Unemployment is projected to fall to its lowest level since the GFC.

The budget also assumes that iron ore prices will fall abruptly from their current record highs:

In line with the prudent approach to forecasting volatile commodity prices, elevated iron ore prices are assumed to decline and the terms of trade are expected to fall by 8 per cent in 2021-22 and by a further 10½ per cent in 2022-23…

The iron ore price is assumed to decline to US$55 per tonne FOB by the end of the March quarter 2022, three quarters later than was assumed in the 2020-21 Budget.

As expected, the Treasury projects a return to ‘Big Australia’ immigration by 2023-24:

Net overseas migration is significantly affected by international travel restrictions and weaker labour markets globally. It is forecast to fall from around 194,000 persons in 2019-20 to be around -97,000 persons by the end of 2020-21, and then to -77,000 in 2021-22 before increasing to 235,000 persons in 2024-25. More broadly, 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.

Accordingly, population growth is projected by the Treasury to accelerate from next year:

Back to a ‘Big Australia’.

The federal budget conveniently makes no mention of per capita GDP growth, which will benefit greatly from the fall in population growth.

Budget spending announcements:

This is a big spending budget that mostly targets the right areas.

Below is a list of the key announcements:

• $1.9 billion is allocated for the roll out of vaccines.
• $1.5 billion for COVID‑related health services, including for testing and tracing, respiratory clinics and telehealth.
• Extension of the low‑ and middle‑income tax offset for another year, which will benefit 10 million low‑ and middle‑income earners ($1,080 for individuals or $2,160 for couples).
• Extension of asset purchase write-offs for Australian businesses until 30 June 2023.
• Another 10,000 places in the first home buyer deposit guarantee scheme.
• 10,000 places for single parents to purchase a home with only a 2% deposit.
• Increasing the amount that can be released under the First Home Super Saver Scheme from $30,000 to $50,000.
• $2.1 billion in targeted support for aviation, tourism, the arts and international education providers.
• $2.7 billion of funding to create more than 170,000 new apprenticeships and traineeships.
• 5,000 places in higher education short courses.
• $1.7 billion to increase the affordability of childcare for low‑ and middle‑income families.
• $15 billion in additional infrastructure commitments.
• $1.2 billion for the Digital Economy Strategy.
• $1.5 billion to expand manufacturing activity and create jobs across six priority areas, including medical products and clean energy.
• $2 billion in R&D tax incentives as part of the Modern Manufacturing Strategy.
• A further $13.2 billion over four years for the NDIS.
• $17.7 billion for aged care to fund another 80,000 new home care packages, as well as to increase the time nurses and carers are required to spend with residents, and increase training places.
• $2.3 billion funding for mental health care and suicide prevention.
• $2 billion to fund preschools and $19 billion in funding for universities in 2021‑22.
• $1.1 billion in women’s safety.
• Enhancing the Pension Loan Scheme by providing immediate access to lump sums of around $12,000 for singles and $18,000 for couples.
• $1.6 billion to fund priority technologies, including clean hydrogen and energy storage.
• $10 billion government guarantee to make insurance more affordable in Northern Australia.
• $270 billion over 10 years to boost our defence capability.

One obvious omission is that the budget does not include any funding to build national quarantine facilities modelled on Howard Springs. This is a big miss given robust quarantine is Australia’s number one defence against the virus.

Nevertheless, my initial impression as I write this at 9.20pm on Tuesday night is that this budget spreads the fiscal fire hose far and wide across a broad range of areas.

The tax relief is generally well targeted, there is lots of spending on economic and social infrastructure, and not too much blatant pork.

Overall, it’s a decent budget that’s right for the times.