By any measure, the Commonwealth Budget handed down last Tuesday was Australia’s most important in recent history.
Coming after GDP contracted by 7.0 percent in the June quarter, it was always going to feature borrowing to fund economic stimulus.
- $24 billion in personal tax cuts over two years
- $16 billion in business tax rebates/concessions. This includes expanding the eligibility criteria for the instant asset write-off scheme to cover companies with annual revenue of $5 billion or less and enabling businesses who make losses in either 2020/21 or 2021/22 to offset these against previous profits made in 2018/19 or subsequent years.
- Hiring incentives including $4 billion over two years in wage subsidies for employers who hire young workers (aged 16-35) who are on JobSeeker and $1.2 billion to extend the Supporting Apprentices and Trainees wage subsidy scheme from March 31 until September 30.
- $14 billion in new and accelerated infrastructure projects over four years including the previously announced $7.5 billion for roads and rail, $4.5 billion for the previously announced NBN upgrades and new money to improve road safety and upgrade local council roads.
- $4.9 billion in pandemic related health funding.
One item not included was any substantial increase in affordable housing investment or new housing incentives. Granted, $1 billion was given to the National Finance and Investment Corporation (NFIC) for affordable housing and there was a previously announced extension to the First Home Lon Deposit Scheme. Nevertheless, there was no extension to the eligibility deadline for the HomeBuilder scheme, which is still set to expire on December 31. Nor was there any new investment social housing – a disappointment to some who believe this could have delivered economic stimulus whilst addressing deficiencies in social housing provision.
Also absent was any extension of the Coronavirus Supplement given to those on JobSeeker payments. Initially paid at $550 per fortnight, this reduced to $250 on September 24 and will phase out completely on December 31. When this happens, incomes of those JobSeeker will fall back to previous levels under the old Newstart allowance. For a single adult with no children, these are currently set at $489.70 per fortnight ($244.85 per week) – a level which many argue is not sufficient to support those seeking employment.
As expected, however, this year’s budget saw the largest fiscal deficit since World War II. In 2020/21, Treasury forecasts that the budget deficit will reach $213.7 billion whilst net Commonwealth debt will rise to $703 billion or 36 percent of GDP. By June 2024, the debt is expected to peak at $966 billion or 44 percent of GDP.
That raises questions about whether the budget has hit the mark.
Such issues were discussed during a panel session organised by the Property Council of Australia on Wednesday. Panellists included Felicity Emmett, Senior Economist, ANZ; Deborah Coakley, Executive General Manager, Funds Management, Dexus; David Harrison, Managing Director and Group CEO of Charter Hall; and Mark Steinert, Managing Director and CEO of Stockland.
Several themes emerged.
(1) The Overall Strategy is Right On
Overall, aforementioned commentators support the government’s approach.
According to Emmett, the move away from fiscal conservatism toward rebooting the economy is the best approach for the challenges we face. So too is the move away from direct income support toward stimulating private sector recovery.
On specific measures, she says moves in relation to personal income tax, business tax and employment incentives will help to spur consumption, investment and hiring.
“The government has rightly thrown caution to the wind along with the fiscal conservatism they have had over the last few years,” Emmett said.
“They have really spent to generate a recovery.”
“What we have is these very large deficits … they are the highest since the post-war period – but very low interest costs mean that we won’t be paying for this for decades. The government just needs to engineer nominal growth of above one percent or so and that will help to pay for this debt. We know that interest rates are below one percent.
“This is the right thing for the government to be doing”
Harrison agrees. He says the budget delivers a ‘shot in the arm’ which the economy needed. Businesses have been given greater confidence in taking on new workers. As businesses reopen, he expects a rebound in consumption.
Whilst border closures remain an issue and there will be delays in the return of international students, Harrison says we now have at least a schedule in relation to the border reopening and says the budget has struck the right balance overall.
Meanwhile, Coakley says measures in the budget will help to underpin confidence both for individuals in their employment prospects and businesses in how they can invest whilst Steinert says tax cuts will aid consumption whilst investments in manufacturing and infrastructure will help to boost productivity.
“I’ve got to congratulate the government,” Harrison said. “I think they have hit the nail on the head.”
(2) Debt Will Be Manageable
As mentioned above, the budget will see deficit and debt rise to levels not seen since World War 2.
This is a contrast to last year’s budget, at which time net debt was expected to be eliminated by 2029/30.
Nevertheless, Emmett says debt will be manageable.
Thanks to low interest rates, Australia’s interest bill over coming years will remain at less than one percent of GDP. This compares with levels of between 1.5 percent of GDP and 2 percent of GDP in the early 1990s.
At any rate, Emmett says the stimulus effect of the budget initiatives will aid economic recovery which in turn will help in servicing debt repayments.
She points out that Australia ran deficits for many years after World War II but was able to pay down debt as growth was strong.
Harrison agrees. With the government borrowing at around one percent per annum, he says we the yearly interest bill will be around $2 billion. This is manageable given the size of Australia’s economy.
Moreover, Harrison says governments worldwide must accept that borrowing to ‘pump prime’ the economy is necessary when the economy is weak. When the economy improves and tax revenues lift, this can be repaid.
Further, Harrison says Australia can deliver much of what the world needs in mining, agriculture and services/education. This provides a firm foundation from which revenue can be generated and debt serviced/repaid.
(3) Risk of Fourth Quarter Cliff
Whilst the budget strategy has been welcomed overall, Emmett says the economy faces a short-term challenge as the volume of money which the government is expected to inject into the economy through direct government support (JobKeeper, JobSeeker etc.) will fall from almost $70 billion or 14 percent of GDP in the September quarter to around $25 billion or five percent of GDP in the December quarter.
Potentially, she says this could impact household balance sheets, budgets and spending and cause the economy to stumble in the December quarter.
Granted, Emmett says the reopening of Victoria will help as will a pent-up desire for people to get out, spend and enjoy experiences.
Nevertheless, Emmett says more could have been spent in the December quarter to solidify the trajectory of recovery over the short term.
(4) Business Incentives Hit the Mark
By far and away, aforementioned commentators say incentives and support for business in the budget are well targeted.
Whilst some specific sectors have been singled out, picking winners has largely been avoided and the incentives offered will support broad areas of the economy.
Further, the incentives address multiple challenges as the extension of the instant asset write-off encourages investment, money for taking on new workers will help to spur hiring and each of these along with the immediate off-setting of tax losses against prior profits will help to improve cash flow.
All this will help to encourage entrepreneurs and promote the growth of small and medium business.
(5) Consumption will recover
Provided further lockdowns are avoided, aforementioned commentators say consumer spending will rebound.
The current recession, Steinert points out, has not been caused by economic weakness or imbalance but rather a freezing of activity to restrict COVID transfer.
Indeed, where the virus has been contained, people are spending. Speaking of Stockland’s portfolio in retail property, Steinert says 98 percent of stores outside Victoria are open whilst sales have recovered to pre-COVID levels in Queensland and WA and are around 95 percent of pre-COVID levels in New South Wales.
Budget measures such as tax cuts will provide incremental fuel to this.
(6) Wages Growth May Underperform
One area that may disappoint is wages.
Under budget forecasts, wages are expected to grow by 1 ¼ percent in 2020/21 and 1 ½ percent in 2021/22 before returning to the low two percent by the end of the forecast period.
With unemployment expected to peak in the current quarter and then to return only slowly to around 6 percent by the end of the forecast period, Emmett says this is ambitious. Prior to COVID, she points out that wages were growing at only two-and-a-quarter percent per annum in a period where unemployment had been at low levels of around five to five percent for some time.
Whilst she remains optimistic about a recovery in consumption overall, Emmett says any underperformance in wages growth could detract somewhat from consumption levels.
(7) Infrastructure Remains Critical
Notwithstanding the weaker outlook for population, panellists say infrastructure remains critical and commend ongoing investment in this area.\
Despite record levels of investment over recent years, Coakley says there remains a backlog of projects which are needed not only to generate employment but also to deliver productive and liveable cities for the future.
Harrison agrees, commending state governments for moving shovel-ready projects through to construction during COVID. That, he hopes, will continue. What we must avoid, he says, is a return to projects waiting several years for approval.
(8) Tax Reform is important, but lower priority
Asked about further tax reform, Harrison would like to see this in the future. Reforms he would like include removal of stamp duty and other inefficient taxes along with a reduction in company tax to levels which are comparable to those in other wealthy nations.
(Currently, Australia’s company tax rate stands at 30 percent for larger companies and 27.5 percent for smaller companies with a turnover of less than 50 million. As at the time of a report published by the Tax Foundation last year, the average rate of company tax across OECD nations stood at 23.59 percent or 26.53 percent when weighted according to GDP.)
Nevertheless, he says those issues were not a priority for the current budget. In this budget, he says the government has done well to address critical and immediate needs.
(9) Reopen Cities, Bring Students Back (Safely)
Critical to Australia’s recovery, Coakley says, will be the reopening of cities and the return of international students.
Granted, this must be done with appropriate COVID measures and protocols.
Nevertheless, she says the importance of this should not be underestimated.
On CBDs, Coakley talks of a need to bring workers back into offices and to encourage small/ medium size retailers to reopen, reemploy casual workers and upgrade their offering where appropriate.
On students, Coakley says international students often bring money from their families and are a significant source of consumption of housing and services along with their contribution to vibrancy and cultural diversity. Furthermore, overseas student fees help to support the world-class research and education capacity for which Australia’s universities have become renowned and which is needed to promote innovation and support world-class cities.
Harrison, agrees. He says Australia has a fantastic education product which brings people to our shores and is a large export earner upon which we need to continue to capitalise.
(10) HomeBuilder Must be Extended
One thing missing from the budget, Harrison says, was an extension to the timeframes of the HomeBuilder program.
Whilst HomeBuilder has been extremely useful in stimulating demand for new home construction, Harrison says the eligibility requirement for construction contracts to be signed before December 31 is creating constraints on availability of builders and placing upward pressure on costs.
He says timeframes should be extended to ease the strain on resources and to deliver a more even form of stimulus which will see the industry through until international migration returns.
(11) Corporate Australia Must be Bold
Finally, Harrison encourages corporate Australia to follow the government’s lead and be bold.
Whilst he acknowledges pain felt by some industries, Harrison said companies should avoid ‘austerity’ and should use cashflow from the instant write-off and the tax loss provisions to invest in their business.
“My message to the CEOs and boards of corporate Australia is to look at what the Federal Government is doing,” Harrison said.
“They (the government) are showing leadership. They are borrowing money, subsiding the economy in areas where it needs to be subsidised but creating incentives for us as business leaders to invest in our companies, to keep people employed and to employ more people.
“I think corporate Australia needs to get out of the fetal position, get on the front foot and grow. You have an environment which allows you to borrow at the cheapest interest rate that you have ever seen in history. You have got lots of subsidies and incentives to encourage you to employ. You could argue that we are at the start of a strong consumption boom driven by government stimulus and improved employment.
“I think corporate Australia needs to get on the front foot …”
“Hopefully, this budget will provide confidence for corporate Australia to move forward.”