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Budgeting for a post pandemic and pre-election world

By Brian Parker, Australian Retirement Trust Chief Economist

30 March 2022

The Australian economy enjoyed a stronger than expected recovery in output and employment from the initial COVID-19 outbreak and has proven remarkably resilient to the latest Omicron outbreak. Massive fiscal assistance – most notably from the JobKeeper and enhanced JobSeeker programs – has been a big part of the story.

The end of those COVID policy measures as well as a stronger than expected economy and higher than expected export commodity prices has produced a substantial improvement in the Budget bottom line compared to earlier forecasts.

The numbers

Since the Mid-Year Economic and Fiscal Outlook (MYEFO) for 2021-22 delivered in December, the anticipated Budget bottom line for this year has improved by over $19 billion to a deficit of $79.8 billion. For 2022-23, the Budget deficit is now forecast to be $78 billion – an improvement of $20.9 billion on MYEFO estimates. Things could have been significantly better – without additional policy measures, the improvement in the Budget bottom line would have been $28.3 billion this year and $38.1 billion next year. However, cost of living pressures need to be addressed and an election is expected to be called within the next week or so. So policy measures give back around $26 billion - around $9 billion this year and $17 billion next.

The measures

A temporary (six month) halving of the fuel excise and a range of cash handouts have been announced to address short-term cost pressures on households. The government would provide a one-off, tax-exempt payment of $250 to eligible pensioners, welfare recipients, veterans and concession card holders. The government would also boost by $420 the Low- and Middle-Income Tax Offset (LMITO) for 2021-22. Households would receive this support from 1 July 2022 when they submit their 2021-22 tax returns. There’s a plethora of new infrastructure announcements with a heavy regional focus and a range of defence announcements, including a substantial boost to Australia’s cyberwarfare capabilities. And there are a series of measures for small businesses, seeking to encourage more apprenticeships and greater take-up of digital technology.

The economic forecasts

The economy is expected to grow by 4.25 per cent this fiscal year before slowing to 3.5 per cent in 2022-23. The unemployment rate is expected to break below 4 per cent, underpinning a forecast acceleration in wages to 3.25 per cent in 2022-23 and 3.5 per cent in 2024-25. The government has attracted considerable grief for their wage forecasts for some years but given how tight the labour market has become in Australia, border re-opening and an inflow of migrant workers probably won’t be enough to prevent the kind of wage acceleration the government is forecasting. Prudently, the current very high prices for our key export commodities (iron ore, coal) are not forecast to last. Taken as a whole, the forecasts are reasonable.

The economics of it all?

The economy is performing strongly and inflationary pressures are building. There is little in the way of macroeconomic policy justification for further large-scale stimulus from either the Budget or from monetary policy. While the government’s largesse is relatively modest in the broader scheme of things (keep in mind that Australia is a $2.2 trillion economy) and doesn’t make the Reserve Bank’s inflation challenge dramatically worse, nor does it help much, notwithstanding the fact the temporary petrol excise cut will ease recorded inflation in the near term.

What does it mean for how we invest members’ savings?

As we’ve indicated previously, the federal Budget rarely makes any difference to the way Australian Retirement Trust or indeed any other major superannuation fund invests members’ savings. It’s the medium- to long-term outlook for the Australian and world economies, inflation, interest rates and corporate earnings that are critical in determining what kind of investment returns our members will achieve, not what happens on Budget night.

This document has been prepared and issued by Australian Retirement Trust Pty Ltd ABN 88 010 720 840, AFSL No. 228975, the Trustee and issuer of the Australian Retirement Trust ABN 60 905 115 063. It contains general information only. Any advice does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of any advice having regard to your personal objectives, financial situation and needs before acting on that advice.