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  • Writer's pictureCrest Economics

Budget Breakdown- May 2021

The 2021/22 Federal budget has been delivered. As the pre-election budget, the generosity of this year's 'spendathon' is certainly a political ploy as much as it is grounded in economic reasoning. Notably, an eschewing of budget repair and growing debt down the track came with the promise of robust fiscal support for key and vulnerable groups in the economy. Among the $96 bn pledged for temporary tax breaks and ongoing social services, some core policies include a $7.8 bn extension of the LMITO and $17.7 allocated to aged care services. A strong emphasis on health was also noticeable, with $1.9 bn dedicated to continuing vaccine rollouts, while key social issues such as women's safety, mental health and national security were also on the spending list. Infrastructure saw a renewed $15.2 bn commitment in predominantly road, rail, freight and community infrastructure, aiming to boost job creation by 30,000 and target the much coveted unemployment figure with a leading 4.

Importantly, it is not lost on the government that the reasons for why "Australia is coming back" are not solely attributable to its fiscal response. Key indicators in the Australian economy have outperformed other major developed economies, with the economy only contracting 0.2% last year. With unemployment forecast to fall to 4.5% by the end of forward estimates, alongside rising inflationary pressures and wage growth slated to reach 2.75% across the same period, the economy is certainly enjoying the upward slope of its v-shaped recovery. Still, much of this is currently buttressed by stellar commodity prices for iron ore, which has added an estimated $20 bn to the budget position. Nonetheless, the days of record trade surpluses and high prices may well be transient, as the reopening of Brazilian mines and tapering Chinese demand due to new policy is expected to take the heat out of demand for Australian steel. As a result, Australia may expect a return to a current account deficit of -2.25% of GDP by 2022/23 according to forward estimates.

For now, the government would prefer not the glance at the receipt. The $300 bn expenditure bill this year comes with a hefty $161 bn deficit, expected to fall to $106 bn in 2021/22. The Australian economy should be prepared to witness a decade of fiscal repair and consolidation as debt continues to rise, forecast to peak at $1 tn in 2025. Needless to say, much work is required to guarantee a smooth journey ahead. There is still the problem of reopening international borders, especially as ongoing outbreaks in countries such as India pose a considerable downside risk to the global economic outlook. While it's been a much fresher look for Australia in this budget, there's still a way to go before we're 'back in black'.

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