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  • Writer's pictureCrest Economics

Federal Budget- October 2020

The release of the delayed Federal Budget has revealed the impacts of the pandemic on the Australian economy, as well as policy initiatives heading forward into the recovery phase. The government projects the budget deficit to deteriorate to $217.7bn for 2020/21, against pre-COVID expectations of a $6.1bn surplus in last year's MYEFO. A number of implications arise from this deficit outcome. For one, net debt is expected to increase from 19.2% of GDP to 36.1% by 2021, potentially weakening the current account surplus, although the effect of this is likely to be partially offset by low current interest rates across the economy. In addition, the long-term scars of the recession are likely to frustrate recovery efforts, especially in areas such as wage growth and spare capacity which remain as structural issues within the labour market. Nonetheless, expected rebounds in revenue and real GDP, the latter potentially reach 4.75% in 2021, should bring some optimism to the outlook, albeit not without some risk.

A number of initatives have been brought forward, primarily targeting aggregate demand as well as the labour market. The personal income tax plan has been expedited with the removal of the middle-income tax bracket, reducing bracket creep. The low-middle income tax offset has also been extended, estimated to reduce receipts by $17.8bn by 2024. Further initiatives including temporary instant asset write-offs for businesses of turnovers up to $5bn, $5.7bn for new infrastructure projects and R&D offsets, have also emphasised the importance of reinvigorating business investment as a key driver of Australia's recovery narrative. Nevertheless, job creation remains a core theme of this year's budget, with efforts being directed toward gradually removing the income safety net provided by the JobKeeper subsidy. Instead, new initiatives including JobMaker and JobTrainer aim to improve employability among groups such as youth workers through the provision of financial incentives as well as aiding reskilling and upskilling. The government forecasts these policies will contain unemployment down to 6.5% by 2021/22, with job stability seen as an important first step to revitalising public demand.

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