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The 2020-21 Budget delivers the biggest Australian deficit since World War 2. The Government’s fiscal stimulus of $51 billion during the GFC pales in comparison to the $257 billion in spending unveiled by the Treasurer yesterday.
We asked leading Australian economists for their first impressions on the budget and how it affects business investment in the short and long term.
Stephen Halmarick, Chief Economist and Head of Global Markets Research, CBA
“Extraordinary times gives you extraordinary outcomes.”
Despite the alarming levels of debt, Mr Halmarick lauded the 2020-21 Budget as a largely effective economic strategy.
“We thought the budget was good. The underlying cash deficit is very large, just shy of $214 billion (11 per cent of GDP). However the best way to think about it is that although debt is rising substantially – it’s going up to $966 billion – the economic return on that debt is going to far exceed the interest costs of that debt.”
The 2020-21 Budget’s focus on boosting cashflow also “hastens the recovery for the economy.”
“This is all about providing cash flow to individuals by bringing forwards tax cuts and providing incentives to businesses to employ people,” said Mr Halmarick.
Mr Halmarick was also optimistic about the relationship between the Government and the RBA in weathering the crisis together.
“There is a large deficit but interest will remain low because the RBA is operating to make sure that interest costs for the Government remain low for a very long time.”
The RBA slashed interest rates to a record low of 0.25 per cent in March this year. Despite speculations of further drops, the RBA has maintained the 0.25 per cent rate.
Mr Halmarick noted that the most sensible next steps in monetary policy will be in increasing bond purchase and the term funding facility (TFF).
“It’s possible they could lower interest rates from 0.25 to 0.1, but the more attractive option is to lower bond yield across the yield curve and fund the banking system through the TFF. That way you have Governments and banks being able to spend money and lend money in the economy.”
Jo Masters, Chief Economist, EY Australia
“It’s not inspiring.”
Ms Masters believes that greater and more long-lasting investment is still needed. Whilst also recognising the need to handle more imminent threats posed by the pandemic, Ms Masters queries whether the Government’s absent long-term strategy will affect business spending.
“By his own admission, Treasurer Frydenberg has delivered a budget that contains a significant amount of temporary spending. The risk of making spending temporary is that it leaves a question mark over Australia’s long-term strategy in an environment where business was already reticent to spend, even before the pandemic arrived,” wrote Ms Masters in a statement.
“Greater business confidence is needed to underpin the substantial additional investment that will help stabilise the economy. For that, there needs to be a more certain economic framework and supply-side reform that reduces friction in business. It would be a missed opportunity if the baton of reform is not picked up in the next budget, due in May 2021.”
Professor James Morley, Professor of Macroeconomics, University of Sydney
“Australia is largely an urban, services-based economy. The budget doesn’t seem to reflect this.”
Professor Morley was confident in Australia’s ability to shoulder a deficit-driven fiscal policy.
“The scale of the budget takes seriously the idea that fiscal policy needs to be the main engine of aggregate demand until the global economy can fully recover from the COVID crisis. Australia has the fiscal space to conduct this deficit-driven expansionary fiscal policy that includes both large increased spending and major tax cuts.”
He also commended the Government’s focus on unemployment.
“A particularly strong aspect of the budget is the clear focus on bringing down unemployment with the clear statement about waiting on “debt repair” until after the unemployment rate falls below 6 per cent. This forward guidance helps provide confidence that the expansionary policies will be sustained and not removed too soon.”
However Professor Morley queried whether there is a strong enough push for business investment.
“The investment allowance is more of a subsidy to existing businesses by bringing forward depreciation rather than a strong incentive for new investment.”
He also noted that there was an over-emphasis on manufacturing, which could mean less uptake on programs like Home Builder. This may result in a “less effective [stimulus] “dollar for dollar”,” said Professor Morley.
“My main quibble in terms of the emphasis of the budget (as opposed to the scale, which seems appropriate), would be too much focus on incentives for manufacturing and physical infrastructure rather than services, including higher education. Other than resource extraction, Australia is largely an urban, services-based economy. The budget doesn’t seem to reflect this.”
Cherelle Murphy, Senior Economist, ANZ Bank
“A very aggressive stimulus package.”
Ms Murphy noted that the 2020-21 Budget is deliberately vague on long-term prosperity goals but is nevertheless important for a healthy economic recovery following the pandemic.
“There’s a lot of fiscal stimulus in this budget. It’s loaded towards getting cash into the hands of households and also to business.”
Ms Murphy also commended the enhanced instant asset write-off rules for facilitating greater and more confident business investment.
“It certainly moves spending in the right direction. It gives businesses a reason to think of some of the investments that they’ve been putting off.
“The problem lies in the fact that businesses need to realise that there’s something worth investing in. This budget will give businesses a boost of confidence because a lot of money is going into household pockets, it gives businesses the confidence that customers will be back.”
Overall, Ms Murphy emphasised the scale of the 2020-21 Budget.
“It’s a very aggressive stimulus package and it’s very much about ensuring the recovery rather than focusing on longer term growth trajectory. You certainly can’t criticise it for a lack of ambition.”
Dr Brendan Rynne, Chief Economist, KPMG
“The Government has gone ‘all-in’ with the Budget.”
Dr Rynne emphasised that the 2020-21 Budget was fundamentally a bet on the private sector’s ability to drive Australia’s post-pandemic economic recovery.
“Treasurer Frydenberg has put the challenge out to the private sector to pull the flailing economy up by its bootstraps,” said Dr Rynne in a statement.
“Underlying that rallying call is a fundamental belief that consumers and investors will look through the current economic haze and will react positively to the incentives put in front of them. The government cannot prop up the economy indefinitely and, through the Budget, seems to be flagging that now is as good a time as ever to issue the challenge to the private sector.”
Dr Rynne claimed that “the sugar hit is short-lived”. By bringing forward economic activity, Dr Rynne argues that the 2020-21 Budget leaves “a void in future demand.”
“A consequence of the government-induced boost to private consumption and investment spending is an increase in inflation of 1.75 percent for this financial year and 1.5 percent for the next. It is highly likely we will see price increases in investment goods as businesses take advantage of the concessions offered in the Budget.”