THE BUDGET 2022: A DEEP DIVE
What is the budget?
Released by the Treasury annually, the budget documents the planned collection and expenditure of resources through the economy for the forthcoming fiscal year and addresses all macro and microeconomic issues.
Why is this year’s budget special?
Budget night every year occupies a special place in every economists’ calendar. This year the Morrison-Frydenberg’s budget announcement has garnered an unparalleled level of attention for two main reasons. Namely, this Federal Budget should be (touch wood) the last of the ‘pandemic-era’ budgets that will influence how the nation navigates the end of the virus and restores overall economic sentiment. This is further compounded with the Coalition chasing a fourth consecutive term in office in the impending election. Thus, this budget is under closer inspection by the public eye due to the place it holds as a political tool, and how it will impact the election campaign of both major parties.
Unpacking the 2022 Budget:
In terms of the main economic indicators,
Economic growth is forecast to hit 3.5% in this financial year, showing a substantial economic recovery on the back of the nation’s first recession in over two decades.
UNEMPLOYMENT and INFLATION:
Australia’s 4% unemployment rate is the lowest it has been since 1974 and is forecasted to fall further to 3.75%. However, economic theory indicates that such low unemployment rates could either be telling of high underemployment, or spell trouble in regards to underlying inflationary pressures. Inflation is a key consideration here as a low unemployment rate will likely translate to higher overall income flowing to households, contributing to greater disposable incomes, hence driving up demand, and with it, inflationary pressures. As for inflation, the CPI (consumer price index) is expected to hit 4.25% later this year, before lowering to 3% in the next 12 months.
Wage growth is expected to be consistent above 3% annually for the next four years. This is a significant point of discussion due to the unprecedented levels of inflation being forecasted. Adequate wage growth is essential in ensuring that the rising cost of living pressures to households do not negatively impact quality of life or the overall real disposable income of consumers.
As concerns regarding inflation were a main talking point in this budget, there were a number of policies aimed at reducing the pressures associated with rising costs of living. Namely these included,
- The provision of a one-off $420 cost of living tax offset. This is intended to bolster the pre-existing low and middle-income tax offset (LMITO), together delivering up to $1,500 for eligible single income households, or $3,000 for dual income households.
- To help Australians meet rising costs of living, the Government is providing a one-off, income tax-exempt payment of $250, being provided at a cost of $1.5 billion.
- The Russian invasion of Ukraine has seen fuel prices increase, adding to the cost of living for individuals, as well as the and the cost of operating for businesses. The Government unveiled a plan to cut the fuel excise. The Government will reduce fuel excise by 50% for 6 months, subsequently seeing excise on petrol and diesel cut from 44.2 cents/litre to 22.1 cents/litre. This will lead to more accessible transport costs, increasing both business trade, as well as consumer activity nationally.
- The Home Guarantee Scheme will double its intake (to 50,000 a year), aiding more first home buyers get into the market.
Otherwise, the net deficit has been revised down from the $835 billion forecast a year ago to $714.9 billion. This $121m improvement is being attributed largely to higher employment rates, lower welfare payments and higher revenues from resources.
Further, a $17.9 billion commitment to infrastructure, centralised around public transport across each of Australia’s 3 big cities was also introduced. This budgetary component echoes hallmarks of an expansionary budgetary stance, with government expenditure centralised around stimulating demand. However, despite this being intended as a not-so-subtle tool for improving public perception prior to the election, there are questions being raised on the business-case surrounding this. The rising prices of steel and cement are collectively causing Australian contractors and renovators to limit activity, resulting in potential limitations surrounding the economic benefits or even viability associated with this expenditure at this current point in time.
After committing to net zero emissions by 2050, the Australian government has made no major promises in this budget about how to fulfil that target. Further, the heavy focus on an economic growth model driven by natural resources and mineral commodities, with a distinct lack of concern for climate change mitigation may spell trouble for the federal government in regards to its relationship with environmentalists and lobby groups, especially with the election around the corner.
In the leadup to the budget, the government talked significantly about the importance of business-led growth. Most economists agree that the budget accomplishes this, with significant support amounting to over $1bn for businesses to undergo staff training and digitisation. However, the popular and well-used Instant Asset Write Off and Loss-Carry Back initiatives that were launched during COVID and aimed to increase business investment have not been extended and will end on June 30, 2023. Despite the discontinuation of these initiatives being surprising, the impact of other pandemic-era initiatives gone-by must be acknowledged. The biggest name of which would be the JobKeeper program, which – many economists and small business owners alike believe – saved the national economy from an otherwise certain crisis. The large cash splash that these initiatives did hold mustn’t be forgotten when considering the lack of renewal, as it’s short-sighted to expect similar levels of expenditure from the government now.
The core economic case for this budget – from the onset at least – seems sound. Significant contributions to infrastructure development, as well as a large focus on alleviating the cost of living pressures paint this budget, and with it the Morrison-Frydenberg administration in a good light. However, such was always to be expected with this speech encapsulating every essence of a pre-election pitch shopping for votes.