Treasurer Josh Frydenberg is expected to deliver a big spending 2021-22 budget on Tuesday night in an effort to continue paving the road to Australia’s recovery from the economic turmoil caused by the COVID-19 pandemic.
He has sold the plan as one focused on harnessing job creation to drive economic growth within a global outlook that remains uncertain, despite Australia’s stronger than expected rebound from the crisis.
Mr Frydenberg has also signalled the government won’t be turning its attention squarely onto budget repair until the unemployment rate can be further driven down, aiming to get the figure below five per cent.
More spending on women, childcare, aged care, disability and mental health – as well as tax offsets for low and middle-income earners – are all expected to be forthcoming.
Deloitte economist Chris Richardson said the government is banking on essentially beginning the process of “repairing the budget” by “repairing the economy” – and this means spending.
“The economic recovery is better than people think it is and that’s important because it was such a deep and sudden downturn,” he said.
“The best way to repair the budget is actually to have an economic recovery. We broadly know that there is extra money coming in the budget.”
Why does this budget matter?
Australia’s stronger than expected economic recovery from the COVID-19 crisis has seen unemployment levels fall faster than expected and bolstered the upcoming budget’s financial position.
But it wasn’t long ago that Mr Frydenberg oversaw the largest budget deficit since World War II – $85.3 billion in 2019-20 – with at least a $150 billion shortfall expected in the current year.
A $197.7 billion deficit had been estimated in the Treasury’s mid-year budget update in December, itself a revision from the record $213.7 billion announced in the October budget.
Mr Frydenberg says the upcoming budget – his third as Treasurer – will prioritise job creation, before turning its focus to repairing the nation’s bank balance.
“We need to continue working hard to drive the unemployment rate lower – that is what the budget will do,” he said last month in a pre-budget address. “Our economic plan is working but the job is not done.”
The government’s recalibrated fiscal policy will focus on pushing unemployment to a figure with a “four in front of it”, which it says is needed to achieve accelerated wage growth and inflation.
The position stands in stark contrast to its pre-pandemic focus of bringing the budget back into the black but has broad support from economists.
“Some of it is simply more money – tax cuts, aged care, childcare and the like – a lot of this is because it absolutely should be done,” Mr Richardson said.
“[But] as always there is a political angle – this may end up being the last budget before a federal election.”
The spending promises from the government come as Australia’s net debt is edging towards $1 trillion, but according to Mr Richardson, budget repair, for now, doesn’t need to be a central focus.
Shadow treasurer Jim Chalmers has also warned the budget can’t be another missed opportunity to address wage stagnation and job insecurity within the economy.
“We can’t have another budget which is just yet another political patch and paint job,” he told reporters on Monday. “[It can’t be] long on politics and long on marketing but short on job security and short on wages growth.”
How will COVID-19 impact the budget?
Mr Frydenberg has also revealed the budget will assume– with the pace of Australia’s vaccination rollout another factor underpinning the economic recovery.
At the height of the pandemic, 1.3 million Australians were stood down or lost their jobs as Australia entered a recession for the first time in almost three decades. This saw the Australian government commit more than $250 billion in direct economic support as it opened its purse strings to head off the economic blow caused by COVID-19 shutdowns.
But the recovery has come quicker than expected with unemployment in March at 5.6 per cent, well below Treasury forecasts of 7.5 per cent as predicted in the 2020-21 Mid-Year Economic and Fiscal Outlook.
Deloitte Access Economics has also forecast Australia’s income is set to be $31 billion stronger in 2020-2021 than Treasury forecasts – the position helped in part by the strength of iron ore prices.
Grattan Institute economist Danielle Wood said the government’s activist fiscal approach in this budget appears to be the right one – the question, she says, is, will the detail match what they’re promising?
“My view is that the government should continue to push the economy to the point where we actually see unemployment come down and wages grow again,” she said.
“The big question mark is how far they will go in spending in some of those areas?”
Where will the government spend big?
More spending is expected in areas designed to target critical services identified as in need of further funding, as outlined below.
Ms Wood said she believed the budget should be judged on how “bold” the government is willing to be in implementing reforms targeted towards these social service measures.
“One of my judgments will be around how bold they will decide to go and will they try and significantly take on reforming those areas that we know are desperately needed?”
- Women and domestic violence
The government is expected to outline significant spending aimed at supporting women after Canberra found itself in the spotlight this year over its treatment of women.
It also comes after last year’s budget was heavily criticised for not doing enough for women with aspects of its COVID stimulus spending identified as being more heavily geared towards male-dominated industries.
“It is measures that are specifically for women, but it is also making sure that we’re spending and supporting sectors that are big supporters of women,” Ms Wood said.
Mr Frydenberg has confirmed the budget will include additional funding directed towards domestic violence support, following demands for more assistance for frontline services.
It’s been reported by Nine newspapers the budget will more than double funding for domestic violence prevention to at least $680 million.
The federal government has also announced it will invest $353.9 million over the next four years towards women’s health programs.
This will include funding directed towards cervical and breast cancer screening programs, the mental health of expecting parents, eating disorder programs and genetic screening of embryos.
The government this month announced a $1.7 billion package over three years designed to reduce out of pocket cost and get more people into full-time work. The response appears to be in part a response to Labor’s promise of universal childcare subsidies in last year’s budget reply.
The government’s plan will involve an increase in childcare subsidies and removal of the subsidy cap for high-income earners – particularly targeting low and middle-income families earning $130,000 or less per year.
The government says the response will benefit up to 250,000 families, though it does not go as far as Labor’s promise of universal childcare subsidies.
The government has also revealed it will commit at least $10 billion over the next four years to aged care in response to a royal commission into the sector
This money is expected to be diverted towards increasing home care packages and building the workforce. The government already contributes more than $21 billion a year to aged care.
The Parliamentary Budget Office has projected that, over the next decade, Australian government spending on aged care will increase by four per cent a year, after correcting for inflation.
This increase means aged care spending will be growing significantly faster than the rate of Australian government spending, according to the royal commission’s final report.
The report also found the collective decisions of successive governments had cut more than $9.8 billion from the aged care budget.
The budget is also set to include new measures targeted towards making housing more accessible.
First-home buyers will be able to release $50,000 from within their super funds as long as they are going to live in the properties they buy with the money. This amounts to an increase to the current maximum withdrawal of $30,000 against the backdrop of a rise in house prices since the scheme began four years ago.
There will also be an additional 10,000 places on a home loan guarantee scheme that allows people to put a deposit on their first homes of as little as five per cent with the Commonwealth backing some of their mortgage.
Another change will allow some 10,000 single-parent families put down a deposit of only two per cent with the government to guarantee the other 18 per cent of the deposit.
A separate $124.7 million is expected to be diverted to social and community housing over two years to help states and territories combat homelessness.
The government is also expected to extend a temporary tax cut for low and middle-income earners for another year. This will involve a one-off rebate for about 10 million people who earn up to $90,000 a year being maintained for the next financial year.
The offset is an end-of-financial-year rebate of up to $1,080 for singles and $2,160 for dual-income couples.
The government has also promised $58.6 million to support what it’s described as a gas-fired recovery, which will go towards supporting gas infrastructure projects.
It has also committed $539.2 million to the development of four additional hydrogen hubs and support for carbon capture, use and storage projects.
The budget is also expected to target school leavers, young Australians and those who are unemployed with a plan to train and reskill the workforce as it attempts to drive down unemployment.
It is anticipated the government will extend the JobTrainer program providing free or low-fee courses targeting areas of skill shortages, including aged care, IT and childcare.
The government has also promised to spend at least.
This will include $2 billion for a new Melbourne Intermodal Terminal link for freight rail services. Another $2 billion will go towards the Great Western High Upgrade from Katoomba to Lithgow in Sydney’s Blue Mountains.
- Climate change and natural disasters
The federal government has also allocated $600 million towards the establishment of a new National Recovery and Resilience Agency. The national agency will support communities hit by natural disasters by helping them rebuild and recover.
It is also establishing a new Australian Climate Service that will attempt to monitor the impacts of climate change and inform the agency.
The government has also revealed $747 million in upgrades to military bases used for wargame exercises in the Northern Territory, with this coming against the backdrop of increasing tensions with China.
Labor has claimed the spending promise isn’t new and was announced back in 2019 when it had initially been valued at approximately $500 million.
The government has also announced a Digital Economy Strategy that will be created at a cost of almost $1.2 billion. This involves digital skills training, the development of artificial intelligence technology, and tax benefits for computer game developers.
It will also deliver $201 million into the myGov online portal to access government services and $302 million into My Health digital records.
The federal budget will be handed down at 7.30pm (AEST) on Tuesday 11 May 2021.