Federal Budget 2020 - the pathway out of recession?
The COVID-19 global pandemic has forced governments - as well as businesses, employees and the wider community - to adapt in ways and at speeds that are unprecedented.
Ordinarily, there are some budget norms against which our analysis and commentary can be framed. Comparisons can be drawn against prior year budget results and projections, and to the guardrails of the Government’s budget principle of achieving a surplus of at least 1 per cent of GDP as soon as possible, consistent with its medium-term fiscal strategy.
2020 has been anything but ordinary.
So much has changed, so quickly, that it is hard to keep up. New policies and programs have been conceived, designed and implemented at a break-neck pace. In late March 2020, when most countries were accelerating into the first wave of COVID-19 infections and grappling with how to contain the spread of the virus, the Australian Government responded with an array of new fiscal interventions. Seemingly every other day there was a new, multi-billion dollar announcement.
The Federal Budget 2020 presents an opportunity to take stock of the cumulative effect of both the health and economic crisis. And the scale is staggering - a budget deficit of $213 billion for FY2020-21, perhaps a decade or more before the budget returns to balance, and net debt peaking at $966 billion, or around 44 per cent of GDP.
Of the many extraordinary events of 2020, we can add a Federal Budget being brought down in October. Conventionally delivered in May, the budget was delayed six months to give Treasury more time to better understand the dimensions of the economic fallout caused by the COVID-19 pandemic.
Treasury has framed the Federal Budget 2020 anticipating that future COVID-19 outbreaks in Australia are mostly localised and quickly contained, border restrictions broadly will ease later this calendar year, that international students will return in late 2021 and that international tourism will gradually recover around the same time. The world economy is expected to rebound strongly in 2021 including, importantly, the economy of our largest trading partner, China. Plainly, risks remain. The budget papers observe that budget outcomes: “could be substantially different to the forecasts, depending upon the extent to which these assumptions hold.”
But some context and perspective is important.
If there is a lesson to be learned from previous recessions, it is that economic recovery takes time, and the burden is not evenly shared amongst the community. Recognising this, the Budget directly prioritises job creation and support - JobKeeper alone represents a commitment of more than $100 billion to support around 3.5 million jobs - hoping to ensure that a generation is not lost to unemployment. In the Treasurer’s own words: “This Budget is all about jobs”.
Net debt is now expected to be more than double that forecast only ten months ago, in the December 2019 MYEFO. However, the cost of servicing that debt, when measured as a proportion of GDP, is actually fairly stable. This has allowed the Treasurer to frame a budget which seemingly avoids the usual trade-offs. Federal Budget 2020 delivers record recurrent and infrastructure spending, whilst also bringing forward previously legislated personal income tax cuts and introducing new business tax relief.
The key test now is execution. Stimulus programs and projects need to be quickly deployed, whilst ensuring that they are designed to self-correct with spending falling away as the economy recovers. Then, as Australia moves from managing the immediate impacts of the health and economic crisis, to recovery, stabilisation and normalisation, it will be critical to ensure that future budget initiatives adapt to focus on enduring and productivity-enhancing programs, and those which boost complementary investment and job creation by the private sector.
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