The budget is clearly a pro-business, pro employment document, containing $98 billion in new spending, including $50 million in tax relief for business and low-and-middle-income earners.
An instant write off for investment for companies up to $5 billion in annual turnover is the major ticket item in the budget with a cost of $26 billion.
The mammoth outlay on spending measures and tax cuts will help drive the budget into a deficit of $213.7 billion this financial year, compared to the $6.1 billion surplus expected before the pandemic.
The astonishing turnaround is the result of $159.8 billion in policy decisions and almost $60 billion in parameter variations outside the government’s control.
While the deficit is forecast to shrink to $112 billion in 2021-22, the Commonwealth will remain in deficit until beyond 2031.
Ratings group S&P Global was comfortable at the surge in debt and deficits (which has been well telegraphed by the government and RBA this year) saying the huge amount of debt forecast the budget is manageable.
S&P director Anthony Walker said on Tuesday night that it was likely the Australian economy would start growing in the current September quarter. But it would take another 18 months to get back to its pre-coronavirus level.
But he did warn that Australia’s credit rating could come under risk if the economy deteriorates.
The outlook is based on growth of 4.75% in 2021-22 in the hope the world recovers from the pandemic, with a vaccination program in place for all Australians by the end of 2021.
That is after the economy contracts by an estimated 3.75% in 2020 and by 1.5% in 2020-21 (down from the July forecast of a 2.5% contraction).
Households and businesses will fuel the growth: the government predicts a 7% rise in household spending, a 7.5% rise in non-mining business investment and a 7% rise in housing investment.
Unrealistically the government also assumes wages growth will have returned to a whopping 2.25% by 23-24 — a level it only briefly reached before the pandemic wreaked havoc.
Economic growth would be one percentage point lower this year and next if a vaccine does not arrive on that timetable.
With millions of workers losing jobs or hours from shutdowns this year, the budget forecasts unemployment to peak at 8% in the December quarter, fall to 7.25% by June 30 next year, falling to 6.5% the subsequent year and 6% in 2022-23.
The government estimates the economy will recover 950,000 jobs over the next four years from a combination of budget measures and the recovery in the economy, based on the crucial assumption of a widespread vaccine next year. A further 550,000 people (including 100,000 apprentices) will be employed via subsidies.
In his post-meeting statement yesterday, RBA governor, Philip Lowe indicated the central bank’s unemployment forecast of 10% by the end of this year would be cut in the bank’s new forecasts next month.
The governor indicated the level of unemployment will peak lower than previous forecasts. It’s August forecast put unemployment at 10% at the end of 2020 and 9.5% next June (In the August Statement On Monetary Policy which will be updated next month with a new set of forecasts).
“Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than earlier expected. Even so, unemployment and underemployment are likely to remain high for an extended period,” the bank said.
In the budget papers the government included Treasury estimates in the budget papers showing the unemployment rate would be five percentage points higher at its peak – that is, 12.25% – without the support measures from Canberra.
The government estimates that because of lower immigration a million fewer people will live in Australia than previous forecasts. That means lower GDP growth.
