The Treasurer delivers the recovery budget
Australia is on the road to recovery according to Josh Frydenberg’s budget speech. There are now more jobs in the economy than existed pre-pandemic. The budget is designed to underpin the recovery. It has one key performance indicator: unemployment. Treasury predicts that this will fall to 4.75% in two years before settling at 4.5% in 2024.
However, even that rate of unemployment will not be enough to lift wage growth to the long-term average of 3%. Treasury predicts that wages will not grow by more than 2.5% over the forward estimates, despite expenditure of more than $550 billion and debt reaching close to $1 trillion.
There are still uncertainties about the economic future. There is no date for reopening international borders and there is no new expenditure for quarantine facilities. Treasury also predicts that Australia will be fully vaccinated by the end of this year, which is something of a leap of faith. There are also fragilities in the international economy with Europe falling back into recession and the prospect of the Indian third wave of Covid spreading to other countries.
For these reasons, the Treasury has taken a conservative approach to some of its estimates. It assumes that real GDP growth will rise to 4.25% next year before falling back to 2.5% in the out years. This is much lower than the growth rates projected by the Reserve Bank. Treasury has also maintained its long-term iron ore price of $55. If, as seems likely, these assumptions are wrong then the debt and deficit situation will be significantly better than forecast in the budget papers where deficits are predicted to stretch all the way out to 2031.
The projected deficit is $161 billion for 2021-22, but rather than tackling this in the next four years, the government’s focus is instead on payments and long-term serviceable debt.
While the budget is likely to meet its ambitions of reducing unemployment, there is some doubt over how transformational it will prove to be. There are some structural reforms in the budget, but they are mainly in the area of social expenditure. There is nearly $18 billion over four years for aged care. The way these funds will be applied means the expenditure will continue after the end of the forward estimates. The same applies to the increased expenditure on childcare and early childhood education.
These spends will create many more jobs, particularly for women, but they will not facilitate structural change in the economy. This will have to be driven by private sector investment. The government has developed a mix of short and long-term policies to encourage investment in new industries.
There is slightly more than $500 million to extend jobtrainer for two years to increase the supply of skilled labour. There is an additional $2 billion for manufacturing research and development. There is also a policy for a tax concession patent box, so that innovators can make greater returns from commercialising inventions. There are also funds for the development of green energy products.
These policies indicate that the government is looking to shift the economy in the direction of a technology-intensive low carbon economy that has bigger manufacturing and knowledge sectors. If it wins another term in government, the social and economic transformation could be profound.