Australia Budget creates lots of winners now, but economists warn of future payback
NT Budget boosted by national GST improvements, but financial books still stained in red
The Northern Territory government has announced significant improvements in its debt and deficit levels, largely off the back of a re-energised national economy. But the Budget books will still be stained in red for at least a decade.Despite the improvements, the Budget books are still stained in red, with no surpluses forecast for at least the next decade.
It's been described as a Hot Chocolate budget: everyone's a winner.
But some experienced budget watchers are warning the sugar hit now could leave a sour taste for future generations.
"We can't expect budget surpluses within the next generation — within 20 years, maybe longer," concludes Stephen Anthony, chief economist at Macroeconomics and a former Treasury official.
"That's why I call it the vandal's budget, because it really is an assault on the sustainability of the Commonwealth budget."
Promises, promises. Josh Frydenberg made a lot in last year’s budget, but did they stack up?
There were a few fails — JobMaker, women — but by getting the iron ore price wrong, the treasurer gained many billions for his coffers.But seven months later, many of Frydenberg’s signature splashes — wage subsidies and women’s economic security — have failed to have a big impact. And it’s unlikely many of the big assumptions underpinning that budget’s optimistic projections will play out.
He says the budget now has a "structural deficit" equal to 3 to 4 per cent of the annual output of Australia's economy.
A structural deficit is where the budget will still be in the red even when the economy is performing around the average levels that economists expect.
In the current circumstances, it means the budget will remain in deficit long after the COVID pandemic is over and the economy has bounced back.
UBS economist George Tharenou points out that the forecast $57 billion deficit in 2024/25 (2.4 per cent of GDP) is actually larger than was forecast at the previous MYEFO update in December, despite a stellar economic rebound since then.
"The materially stronger-than-expected economy improved the budget position by a cumulative $104 billion over five years," he notes.
What's in the budget? Here are the key measures we already know about
The federal budget will have measures for retirees, single parents, and first home buyers. What about you?Pre-budget leaks are a well-established tradition, and this year has been no exception.
"Surprisingly, however, this was almost completely offset by policy decisions (i.e. that deteriorate the budget balance), which provided far more than expected additional fiscal stimulus of $96 billion over five years."
The deterioration of the 2024-25 budget forecast shows how persistent this extra spending is.
'Piecemeal approach' lacks reform agenda
Stephen Anthony is highly critical of much of it.
"This is typical of a government that's very piecemeal in its approach," he laments.
"There are some good elements to some of the things that it's doing, but it doesn't connect that to a broader reform agenda, say like the New South Wales government.
"It essentially is creating leaky buckets all over the economy, that will never fill and therefore never collect revenue in the future."
Economist Andrew Charlton is managing director at Accenture Australia and was an economic adviser to then-prime minister Kevin Rudd throughout the global financial crisis.
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. 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.
He is less harsh on the budget overall, but says Scott Morrison's government hasn't learned from some of the mistakes the Rudd government made a decade ago.
"When push came to shove, Morrison and [Treasurer Josh] Frydenberg did the right thing for the economy in putting together a big package," he says of last year's emergency stimulus measures, such as JobKeeper payments, tax breaks for businesses, and increased welfare payments.
However, he adds that: "This budget bakes in a lot of spending that's not one-off spending, but ongoing spending."
"The childcare measures, the tax cut measures, the unemployment benefit measures, all of those are spending measures that will last a long time and make it very difficult to get back into balance.
"It took 10 years after the global financial crisis for the budget to get close to balance.
"This deficit is much higher than the global financial crisis. So, we have a very long way back to surplus for Australia."
Budget gets a 'solid B' and maintains AAA
The Grattan Institute's chief executive, economist Danielle Wood, has a more positive assessment of the budget.
Budget 2021 backs jobs, mental health and farmers in Queensland but misses support for social housing and tourism
Farmers, mental health and support for jobs are the winners for regional Queenslanders in the budget, but the housing crisis has largely been ignored, say advocacy groups.But like so many others facing the regional rental crisis, the budget has provided no new hope for the central Queensland family-of-seven's need for long-term accommodation.
"I'd give it a solid B. This is a good budget," she concludes.
"The government set out what I think is a good fiscal strategy and it said, 'Let's push unemployment down. Get wages growing again.'"
Ratings agency Fitch takes a similar view, in reaffirming Australia's AAA credit rating, albeit with a negative outlook.
"The underlying budget assumptions appear credible, including the use of conservative iron ore price and employment forecasts," says its director of Asia-Pacific sovereign ratings Jeremy Zook.
"In our view the government's plans to support employment and firm up the post-COVID economic recovery through tax cuts and job creation measures should help boost medium-term growth, which in turn is positive for the medium-term debt trajectory."
Stephen Anthony disagrees, pointing out that Australia's economy is growing so strongly at the moment that it doesn't need so much continued stimulus, especially given the surge in a range of asset prices, notably housing.
"You ask yourself, do I need to do anything else for the coming year or future years to drive the economy forward?" he questions rhetorically.
"I would answer no, that's procyclical, you are actually throwing fuel on the fire, which will cause other economic imbalances down the track."
Nobody can predict the future, least of all in a pandemic. But last night's budget had a crack at it
From international travel to vaccines and social distancing, the federal budget paints a picture of what life in Australia could look like in the next year.And the federal government, burned by Prime Minister Scott Morrison's failed ambition to administer four million vaccine doses by April, is particularly reluctant to set any expectations around how, or when, the pandemic might end.
Extra stimulus may push up interest rates
George Tharenou agrees and warns that some of the benefits to households and businesses from all this extra spending may come with a cost – higher interest rates.
He argues that the persistence of stimulus "for several years ahead" despite nearing full employment will put upward pressure on wages and inflation.
"We still expect the RBA to hold the cash rate until end-2022, but we now see the risk of an earlier rate hike than the RBA's forward guidance of 2024."
Stephen Anthony sees the risk of higher interest rates as just one of many ways in which Australians may end up repaying the current budget largesse in the future.
"These deficits and this debt that we're racking up has to be paid for eventually in some way. It may not be not be the obvious way," he explains.
"So the obvious way is higher taxes. It could come through higher debt interest burden, a risk premium. And obviously everybody paying higher interest rates relative to the world.
"Or it could come in the most subtle way, which is sort of financial repression. This is where, essentially, the RBA monetises the debt through monetary expansion, which it appears to be trying to do, and all of us earn lower returns on the assets that we have invested in superannuation and other investments across the economy."
COVID caution or electoral ploy?
Certainly, as evidenced in the budget forecasts, the government says it is in no hurry to bring the deficit back down towards a budget balance.
"Fiscal repair will come once we see that employment rate at levels that indeed are … pointing towards growth in wages, a strong economy," Finance Minister Simon Birmingham told The Business on budget night.
Federal budget under fire on Q+A as Jim Chalmers talks slush funds and Jacqui Lambie takes aim over national debt
Shadow Treasurer Jim Chalmers accuses the government of using slush funds in the budget as independent senator Jacqui Lambie calls out the government for leaving future generations with a trillion dollars worth of debt.On Thursday night, Minister for Superannuation, Financial Services and Digital Economy Jane Hume was left to fend off criticisms of the government, which came especially vigorously from Independent Senator Jacqui Lambie and Shadow Treasurer Jim Chalmers.
"We are very pleased with the economic strength and resilience Australia has shown, but the global uncertainties are enormous right now, the risks that we face are still significant, and that's why we've had to continue to invest, to drive that jobs growth and to manage the COVID pandemic."
Stephen Anthony takes a more cynical view of the government's fiscal strategy.
"It does look like we do have to take a more aggressive approach to repairing the structural budget," he argues.
"Obviously, there'll be a time for that and, presumably, the government's judgement is that that's after the next election."
Andrew Charlton is in no doubt about the politics of the government's budget.
"We don't know where the hammer is going to fall here in Australia," he says of likely future spending cuts or tax increases.
"But this budget is a pre-election budget and there is no question there is a lot of hard roads to go in terms of fixing the situation."
Gallery: The red flags of recession (StarsInsider)
Victoria's post-pandemic recovery 'on track' but budget deficit forecast to be $11.6 billion .
A better-than-expected deficit of $11.6 billion is forecast for next year in the Victorian budget as the state economy bounces back after last year's lockdown.The final deficit for the COVID-hit 2020–21 budget is nearly $6 billion less than forecast at $17.4 billion.