The federal budget for 2020-21 was released by the Australian government this week. In common with many other countries, the ongoing pandemic has had a profound impact on the Australian economy. The country has had something of a rocky ride with regard to the pandemic (something of course that it is far from alone in). After a very impressive start to handling the pandemic, flare-ups in Victoria in particular led to stringent local lockdowns. However, proportionately in public health terms it has still done very well compared to many others. As of 9 September Australia had reported cases of just over 27,000 so far and 897 deaths. In terms of per capita comparisons that calculates to 1,064 per million of the population in terms of cases and 35 deaths per million. In comparison for example the US is reporting 657 deaths per million, Brazil 700 and Peru has just become the first country to reach the tragic benchmark of 1,000 deaths per million.
The economic situation in Australia has been compounded by other challenges. The environment has been hostile and this has been a year of drought and fires. In addition, the relationship between Australia and its major trading partner China has become increasingly fraught. Therefore the difficulties caused by the pandemic are added to by a number of other factors. At the macro level, this has led to a cash deficit in 2020-21 of $AUS214 billion though the government anticipates that this will improve in the medium term. Gross debt is expected to be at 44.8% of GDP at the end of 2020/21 and increase beyond that to 51.6% of GDP. In addition, the fiscal situation, which resulted in the budget being in balance for the first time in 2018/19, is naturally under pressure because of the measures taken to deal with the pandemic.
The government says that its revised economic and fiscal strategy recognises that economic growth and job creation are essential to repair the budget and ensure that over time a sustainable budget position emerges again. Their hope is that as economic recovery takes hold then the budget position will also strengthen. The target is to take the unemployment rate comfortably below 6% and return it towards previous levels in the medium to longer-term. The focus will then shift to reducing debt as a share of GDP. In the long term the government says that its longstanding commitment to a low and sustainable tax burden, the guaranteed provision of essential services and budget and balance sheet discipline will be maintained. After the economy contracted by 7% in Q2, the government forecasts that by the end of the year economic activity will be picking up again. This activity will be supported by $AUS257 billion in government economic support. It anticipates that the unemployment rate will peak at around 8% in December before recovering over the next few years. By June 2022 it hopes that unemployment will be at around 6.5%.
In practical terms the government is extending personal income tax relief to support the recovery and is bringing forward some tax cuts that were previously announced. An extension to the Home Loan Deposit Scheme will allow 10,000 first time buyers to purchase homes and there will also be significant investment in infrastructure projects which will hopefully create a further 40,000 jobs. Tax incentives around investment projects have also been introduced in another effort to reboot the economy. Technology will also feature through the governments Digital Business Plan which will include plans amongst other things to widen access to ultra-fast broadband. Red tape is to be cut and employers will be encouraged to take on additional employees between the ages of 16 and 35 through the Job Maker Hiring Credit. These are some of the key features of a wide package of measures announced by the government. In common with many other countries one assumes that the hopes and expectations that underpin the budget and the anticipated recovery are highly contingent on the future path of the pandemic. At least with the steps that have been taken to reduce infection rates this hopefully gives some degree of confidence that the pandemic can be kept under control which is critical if the picture for the Australian economy is to strengthen as desired.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.