The Budget: A discussion


The Budget: A discussion

by Vinamra Gulati



What is the budget?

The budget serves as a macroeconomic tool in the Government’s implementation of fiscal policy. Released by the Treasury in May of each year, the budget documents the planned collection and expenditure of resources through the economy for the forthcoming fiscal year. 

Why is this year’s budget special? 

Budget night every year occupies a special place in every economists’ calendar. However, this year in specific, the Morrison-Frydenberg speech garnered unprecedented attention, as it was expected to map out the economy’s golden ticket-esque path to recovery. Expectations surrounding this second pandemic budget were that it would follow suit of the first (which saw over $291 billion in government spending), in keeping with substantial economic support to stimulate economic activity and prop (or supposedly propel) economic growth. 

Unpacking the budget:

Josh Frydenberg handed down the 2021-22 Budgetary Speech on the 11th of May in a political and economic climate underpinned by an aura of uncertainty. The budget, entitled “Securing Australia’s recovery” had a few key announcements, of which the highlights include:

•    Underlying cash deficit forecast to reach $106.6 billion in 2021-22

•    The low and middle-income tax offset to be extended to 2021-22

•    Loss Carry Back extended for losses in the 2022-23 year

•    Childcare made more affordable to reduce barriers to work

•    Women’s Statement returns; targets safety and economic security

•    Record investment in health and essential services

•    Infrastructure focus on productivity, national freight & supply chains.

(Deloitte, Federal Budget 2021-22, 2021)

 The 'usual sort of stuff' in the tax cuts for low to middle-income earners ($1080 for individuals and $2160 for dual-income couples), and heavy expenditure on infrastructure ( $15.2 billion over the next 10 years) should stimulate household expenditure and fuel construction-sector driven growth. However, there is growing criticism of the emphasis on ‘Homebuilder’. The Homebuilder initiative is expected to drive $30bn in residential construction, while lowering the barriers to entry for first home buyers and investors, lowering deposit requirements to 2% for some individuals. As such, asset price inflation resulting as a consequence of these initiatives is expected to be immense. This sentiment was further echoed by UBS’ chief economist George Tharenou saying it “would soar more than 10%” citing the 45000 additional houses Homebuilder would finance, making accessing real estate further inaccessible for new buyers.

The extension of the Loss Carry-Back scheme has notable impacts for businesses. Under this scheme, Australian firms will be able to ‘carry’ their operating losses forward into future financial years to ‘offset' their profits, and in doing so, decrease their final tax position. This centrally aims to have an expansionary effect on the domestic economy, through increasing retained profits, hence driving private business investment, and in turn economic activity.

Similarly, the extension of childcare subsidisation (whereby a portion of childcare costs are covered by governments), aims to increase labour force participation. The basis of this scheme is to increase the overall human capital, and thus productivity across the labour force, hence driving improvements in operational efficiency across Australian business, and thus increasing output, hence further contributing to economic activity. 

Further, the budget committed significant funding to drive six main manufacturing priorities under the 'manufacturing, science and research’ budgetary component. The government aimed to address vulnerabilities in domestic supply chains that were previously exposed through the external shocks and supply chain disruptions associated with the COVID-19 induced recession. However, the heavy investment into the six core manufacturing industries - resources, food and beverage, medical products, recycling, space and defence - can be analysed through two main rationales. First, arguments of self-sufficiency to safeguard against the aforementioned supply chain vulnerabilities are being mitigated through investment into recycling, medical products, space and defence. The secondary rationale being export revenue, being driven through expenditure into mineral resources and food and beverage. By financing investment into innovation into the latter two sectors, the government, in theory, would aim to improve efficiency and productive capacities within these industries. As such, by improving output, export revenue should improve, hence improving Australia’s net trade, and hence overall external position. 

However, for Australian business, the effectiveness of this may be limited, especially given Australia’s significantly high labour costs, thus impinging on the international competitiveness gains derived from this improved productivity for Australian business. As such, the real impact on the performance of firms in export industries can only be revealed in due course. 


However, the political significance of fiscal policy stances is especially pronounced in this budget. With significant investment into aged care, security programs and safety for women, the budget embodied significant undertones of catering to political problems, as opposed to combating economic volatility and the threat of declining economic growth ($17.7bn into aged care, $1.1bn into Women’s safety and $1.9bn into national security). Due to the recent royal commissions and inquiries into the conditions within aged care homes and growing turbulence surrounding the mistreatment of women in politics, along with the looming Federal election, this budget may be viewed by some as the Morrison administration’s ‘promise budget’ to build semblances of trust before facing the polls.

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