HSC Economics 2021/22 Federal Budget Overview

June 23rd 2021 by Proteeti M and Parthraj S

Click here to download a visual summary.

 

With high commodity prices, and significant improvement in the Federal Budget Position in 2021/22, the Australian Economy is projected to have strong growth after the Pandemic recession. 

The 2021/22 deficit has been estimated to be 5% of the GDP at $106.6 billion. This deficit is expected to reduce to 2.4% by 2024/25.

To strengthen the economy after the effects of COVID-19 the government has proposed several spending initiatives, these initiatives are aimed at alleviating the effects of the pandemic, providing support for low-to-middle income earners and strengthening the NDIS.

 

Forecasts

Forecasts table

Economic Growth and Quality of Life 

The 2020/21 Federal Budget was a response to the COVID-19 Pandemic, whereby it implemented the fiscal stimulus with extremely loose monetary policy to support Australians.

Now, the 2021/2022 Budget promotes spending and recovery. Due to effective management, good fortune and geographic isolation, Australia has managed the domestic COVID outbreak relatively well, and thus our recovery has been stable.

There are positive outcomes for government forecasts in the long term, with real GDP expected to rise to 4.3% in the upcoming financial year and treasury analysis shows that the budget’s economic support measures are expected to result in an increase in economic activity in 2021-22 by 4.5%. 

This Budget’s Key Policy Announcements promote the quality of life of Australians while also improving economic growth.

Over the next 5 years, an extra $17.7 billion has been allocated to aged care. This will go towards the training and education of 38 000 new staff and increased support for elderly to remain at their own residences. 

An extra $13.2 billion over the next 4 years will be committed to the NDIS. There will be an increased number of health services on the Medicare Benefits Schedule and this budget has increased their funding towards mental health. Whereby $2.3 billion has been given to the provision of mental health treatment and services. An extra $1.7 billion being allocated to child care, and families with 2 or more children should see a reduction in child care costs. 

In the Family Home Guarantee Program, Single parents with household income of less than $125 000 will now be able to buy a home with a deposit of 2% - government guarantees the remainder of the deposit. 

However there are only 10 000 places available from 1 July 2021.

Further, in the New Home Guarantee Program another 10 000 places are being added. Allowing first home buyers to build or buy with a deposit of 5% - government guarantees the remainder of the deposit. 

The First Home Super Save Scheme has also been introduced, now the maximum releasable amount from super has been increased from $30 000 to $50 000. This enables first home buyers the ability to support a deposit of up to 10% on a loan worth $500 000.

$16.6 million has been allocated for programs covering women’s health. Further, a $1.1 billion package has been made to support victims of domestic violence and legal support for women.

And, over the next 10 years an extra $15.2 billion for transport infrastructure has been featured in the Budget and a spending of $110 billion for infrastructure.  

Full Employment

Unemployment rate is expected to decrease every year moving forward, however many of the jobs created are expected to be temporary with no long-term job security or significant wage growth prospects. To tackle this and to continue to drive the unemployment rate towards the NAIRU which is estimated to be at 4.50-5% long term supply side policies should be implemented. 

Peak unemployment is forecasted to return to 5% unemployment in June 2022. 

Although the budget has been focussed on strong growth, there are some key policies tackling unemployment. 

Over the next 3 years, there has been $2 billion set aside for preschool functions and $6.4 billion for skills training and apprenticeship subsidies, this should incentivise upskilling in the workforce, leading to a more skilled and larger labour force, potentially decreasing unemployment rate in the long term. 

To support the tourism industry and cultural sector, $1.2 billion and $300 million has been allocated respectively. This should slowly build up these industries that were heavily affected by the pandemic. 

Employment

Price Stability

Inflation will continue to increase over the short term with the CPI expected to rise as a result of increasing fuel costs, commodity prices and rental costs as well as other factors. With the budget focusing on recovery, inflation is expected to grow. The growth in real wages will place upward pressure on producer costs, and prices of general goods and services. 

It should be recognised that all changes in the 2021/22 Federal Budget have indirect impacts on inflation. 

If the government successfully achieves their goal of returning to pre-COVID economic growth levels, rising inflation will inherently be a byproduct of this, whereby increased business and consumer confidence will lead to greater spending and a general increase in the price of goods and services. 

External Stability 

In order to provide ongoing monetary support through the economic crisis, the Australian Government net debt is expected to peak at 40.9% of the GDP in June of 2025. This means that net debt is expected to rise. In 2021/22, the debt is expected to be at 34.2% of the GDP. 

Net interest repayments are forecasted to continue to be manageable at 0.7% of the GDP, due to low costs of debt. 

The Budget’s focus on economic growth and job creation will allow the Government to maintain and reduce debt over time. Whereby it is expected to fall to 37% of the GDP by June of 2032. 

Once growth and unemployment are at or lower, than pre-COVID levels the Government can specialise on reducing debt.

Environmental Sustainability

The Federal Budget has given huge importance to ESG and Environmental Sustainability.

There is now $565.8 million for international technology initiatives and projects. Development of clean hydrogen and the “Clean Hydrogen Certification Scheme '' has been allocated $275.5 million and to support carbon capture the Budget has allocated $263.7 million. 

Supporting industries to reduce emissions and adopt more environmentally sustainable technologies will be accelerated by the $316.7 million set aside. 

Distribution of Income 

The Federal Budget has made tax incentives to support the recovery from the Pandemic. 

In the low and middle income tax offset (LMITO) there is an additional $7.8 billion in tax cuts. This has been added on top of previous tax cuts in previous budgets. This offset will be worth up to $1080 for individuals. 

Forecasts made by the treasury suggest the extension of the LMITO will increase GDP and create another 20 000 jobs by the end of 2022/23. In the upcoming years, it is expected that 95% of taxpayers will be having a marginal tax rate of less than 30%. 

For small to medium companies, tax rates will drop by 5% down to 25%. Breweries and Distilleries will receive a tax break of $250 000 and the digital game development industry should see tax reductions. 

Visual Summary

By Louise Z

The following is an infographic summarising the key stats under key headings. To download a copy of this click here.

Infographic Summary