A Balancing Act Between Social and Economic Objectives: The 2021-22 Budget
Josh Frydenberg’s third Budget dropped this week with all the hype of a new record. In musical circles artists tend to branch out creatively on their third album, diverting from the mainstream and even their own genre to try new things.
The Treasurer appears to be doing just that with the 2021-22 Budget. More funding has been directed to social policies rather than economic policies and this Budget shuns the traditional Liberal pursuit of surplus to focus on spending, job creation and stimulus.
Politically, it has captured traditional Labor policy space, making it hard for the Opposition to attack it in the lead up to the next election.
Treasurer Josh Frydenberg says “Team Australia” is coming back from the COVID-19 recession as he hands down the 2021 budget (Photo: Herald Sun)
Deficit and Debt
The 2020-21 underlying cash deficit was estimated to be $198 billion in December’s Mid-Year Economic and Fiscal Outlook (MYEFO), this was revised to $161 billion on Tuesday. The reported Budget deficit of $107 billion was largely unchanged from the MYEFO forecast but this still represents an almost $60 billion improvement from 2020-21.
The main drivers of this improvement are record high iron ore prices, strong jobs growth, lower JobSeeker payments and a lift in company tax receipts. Even the Budget acknowledges that iron ore prices aren’t going to stay that high for much longer.
Deficits are forecast for every out year with $57 billion expected in 2024-25.
All these deficits mean increasing debt over the forward estimates. Net Debt is forecast at $729 billion in 2021-22 (down from a forecast $799 billion at MYEFO) before increasing to $980 billion by 2024‑25.
Arguably the biggest surprise of the past year has been the spring back in employment post COVID-19 lockdowns. Since December’s MYEFO the forecast unemployment rate has been revised down significantly from 7.25% to 5.5% for 2020-21 and from 6.25% to 5% for 2021-22.
But the Treasurer has signalled in an emphatic way the government’s intent to drive unemployment down to pre‑pandemic levels and beyond. Measures aimed at doing so target skills, infrastructure, tax, energy, the digital economy and deregulation.
Again, setting an unemployment goal of below 5% will make it hard for Labor to attack and point to an alternate strategy.
Iron ore mining is certainly contributing to the Budget rescue.
At the release of the 2020-21 Budget in October, Treasury forecast an iron ore price of $55 per tonne and the actual price was around $121 per tonne. Fast forward six months and the actual price is around $230 per tonne, representing a significant Budget windfall.
(Photo: Financial Review)
Treasury is still predicting a fall in the iron ore price to $55 per tonne by the end of the March quarter 2022, three quarters later than was assumed in the 2020-21 Budget.
Given the strength of the iron ore price, is a decline to $55 per tonne realistic? Probably not, however taking a conservative approach to commodity price assumptions is prudent.
The low- and middle-income tax offset was extended, benefitting about 10 million workers The offset is worth up to $1080 for those earning between $48,000 and $90,000 and $2,160 for dual income families.
For businesses, the temporary full expensing and temporary loss carry back has been extended to provide additional support and help take the pressure down for business, boost investment and create jobs.
Six months ago, in the October Budget update, the Government was assuming borders would reopen this year. However, this Budget assumes international borders will remain closed until 2022 (possibly longer).
Health and mental health
Given the health and mental health impacts of the COVID-19 pandemic, the Coalition has accordingly announced a significant, and arguably overdue, increase in funding for mental health.
Following last year’s Productivity Commission inquiry and report into Mental Health, the Budget outlines plans to invest $2.3 billion into mental health support and suicide prevention.
COVID-19 continues to pose the biggest health risk in our community. Accordingly, the Treasurer announced a further $1.9 billion for the roll out of vaccines.
Other general health measures announced include:
- $220 million to update and add new services to the Medicare Benefits Schedule;
- A decrease in the cost of some medical devices; and
- A $114 million extension of telehealth services introduced at the start of the pandemic.
The Commonwealth will also increase its contribution to the National Disability Insurance Scheme participant support costs from 55 per cent to 58 per cent at a cost of more than $13 billion over four years.
The Budget announced measures to reform early childhood education and increase participation at preschool level ensuring more children are ready for full time schooling. This will be done via a $2 billion Strategic Reform Agreement with the States and Territories.
Record funding for school aged education was also announced with a total of $289 billion over 10 years being invested in our children’s education.
Before the Budget Scott Morrison announced a further $10 billion would be allocated to transport infrastructure.
In addition to this, regional Australia is to receive $250 million to improve roads and infrastructure in the sixth round of the Building Better Regions Fund. This Fund has proved important for a number of WA’s remote mining projects.
Infrastructure spend state-by-state (9 News)
WA will receive $1.3 billion of the $10 billion in new cash for road and rail projects including:
- $237 million for METRONET works at Hamilton Street and Wharf Street; and
- $200 million for upgrades to the Great Eastern Highway.
A further $288 million is being allocated to WA for road safety and community infrastructure projects.
The transport and logistics sectors are big winners from this Budget, and this increased spending will create jobs. However, it will be years before this spending translates to tangible, long term benefits such as increased productivity and a reduction in congestion.
Industry, Science, Energy and Resources
Industry assistance in this Budget shies away from “traditional” sectors in favour of emerging and future industries.
A $1.2 billion digital economy strategy was announced including:
- More than $100 million to boost digital skills;
- $124 million of funding in artificial intelligence, including $54 million for a national artificial intelligence centre;
- Tax incentives for video game developers;
- A program focused on commercialising 6G mobile technology; and
- $33 million in grants for development of aviation technologies.
This strategy will create jobs as well as improve productivity through the application of new digital technology to business and everyday life.
The Budget further backed a gas fired recovery by allocating $58 million to support key gas infrastructure projects.
It also provides assistance for small brewers and distillers. They will be able to claim a full refund on excise paid up to $350,000 a year. This is a significant increase on the current arrangements of a 60 per cent refund up to $100,000 annually.
A $135 million deregulation package will aim to cut red tape and drive efficiencies across all areas of the economy.
The Budget delivered a raft of announcements aimed at getting first home buyers and single parents into their own home.
Under the Family Home Guarantee Package, the Commonwealth will guarantee 18 per cent of the value of home loans for single parents with a household income of less than $125,000. This will allow up to 10,000 single parents (over four years) to get into the housing market with only a two per cent deposit from July 2021.
Single parents and first home buyers have emerged winners in the Federal Budget that aims to get people into the property market sooner (Photo: Unsplash)
The scheme targets single mothers in particular, with the Government estimating 80 per cent of eligible single parents will be women.
The First Home Loan Deposit Scheme (rebranded as the New Home Guarantee) will be extended to a further 10,000 people. The scheme enables eligible new home buyers to purchase or build new homes with a deposit as low as five per cent, with the remaining 15 per cent guaranteed by the Government.
First home buyers will also now be able to release up to $50,000 (up from $30,000) of voluntary contributions from their superannuation to purchase a home.
The Budget has allocated $539 million for new clean hydrogen and carbon capture, use and storage projects (CCS/CCUS) to help cut emissions and create jobs.
Around $276 million of this will go towards the development of four additional clean hydrogen hubs in regional Australia and set up a clean hydrogen certification scheme.
The remaining $263.7m will support the development of CCS/CCUS projects and hubs.
A $566 million international technology package will help fast track government priorities under its Technology Investment Roadmap. The Roadmap outlines goals such as hydrogen production under $2 per kilogram and low emissions steel production under $900 per tonne.
Both of these policy goals are important for WA, especially given the State Government’s focus on becoming a major hydrogen producer and exporter.
Farming of our great southern land is the backbone of Australia. The Budget contains several measures to ensure farmers achieve $100 billion in farm gate output by 2030 including a $371 million boost to the biosecurity system.
Most people look at the Budget with an eye to the impact on their own household. This Budget doesn’t have much in it for “everyday Australians”, instead providing help to specific cohorts who need it most.
In the wake of the Aged Care Royal Commission, the Budget contained a $17.7 billion package over four years. The key focus of the package is building a better paid and better trained workforce in the sector.
- $7.8 billion will be put towards reform of residential care under a new funding model, which will better align funding with patients’ care needs.
- $6.5 billion will go to delivering an additional 80,000 home care packages.
Several changes to superannuation rules will help many older Australians.
- From July 2022, people aged over 60 can make a one-off contribution to their Superannuation of up to $300,000. This threshold was previously 65.
- Work test rules for older Australians will be scrapped. These rules restricted contributions to Super unless you are working a certain numbers of hours.
There was a very specific focus on women and women’s health in this Budget.
- A $1.7 billion package was included in the Budget to increase the childcare subsidy to a maximum of 95 per cent for the second and subsequent children in care and abolish the $10,560 annual subsidy cap for high-income earners.
- There was also a $354 million female health package targeted at improving anxiety and depression services and cancer and reproductive health.
- $100m has been allocated to breast and cervical cancer screening programs.
- $13m will go to establishing a National Eating Disorder Research Network.
The JobTrainer program has been extended by a year with a total of $2.7 billion now allocated to create 170,000 apprenticeships and traineeships. There will also be a focus on training support for women and indigenous people.
Additionally, the safer communities fund has been recut to include $20 million for early intervention programs for youths at risk of turning to crime.
The Budget is clearly framed to position the Coalition Government in the driving seat in the lead up to the election, due next year. However, it also channels funding to specific people and demographics who are vulnerable and in need of funding.
The Budget balances this by targeting specific sectors to create jobs and continue Australia’s path to recovery. These small-target funding projects lack the scale and vision of past initiatives, leaving business to do the heavy-lifting of bringing the economy back to recovery, but arguably the stimulatory packages in the early days of the pandemic are still working their way through the economy.
The Budget also lacks any serious structural reforms to support a country with closed borders, labour constraints, challenges for business investment and non-competitive corporate tax rates. Critics may also raise the lack of focus on the environment and indigenous issues.
In summary, the Budget is a statement of intent at its core and execution is everything. We will learn more in the coming year if the balance between social and economic objectives is right and if the targeted programs are effective in helping the right people and pulling the right economic levers.
Cannings Purple’s Government Relations team is well versed in all aspects of Commonwealth and State government policy.
Contact us for more detail on how the Budget will affect your business and how to work in concert with all levels of government.