With the country in the grip of its first recession in 29 years, treasurer Josh Frydenberg will set out on Tuesday evening how federal revenues have been hit, and how much and where the government will spend to pull Australia out.
Hits to household and business earnings due to Covid-19 are set to deliver a budget deficit of $200bn, with a further rise in government spending beyond that to stimulate the economy.
The Coalition has abandoned warnings of a debt and deficit disaster, acknowledging that to grow the economy the government should be spending more – at least until unemployment is “comfortably within” 6%.
Tuesday’s budget will be forward-looking: setting out projections for key economic indicators and announcing job creation measures as Australia hopes to turn the corner on the recession as coronavirus infection rates decline in Victoria’s second wave.
When and how will it be delivered?
Frydenberg will deliver his budget speech at 7.30pm, after separate lock-ups to allow journalists and stakeholders to study the major measures ahead of time.
The budget is usually held in the second week of May – but Covid-19 threw everything off-kilter in 2020.
What can we expect?
A combination of measures targeted at households and businesses to encourage them to spend and invest.
For household budgets, the most important item will be income tax cuts. After flagging tax cuts were coming for weeks, the government will bring forward stage two tax cuts legislated to start in mid-2022 to July this year. Under the proposal, the top threshold of the 19% tax bracket will rise to $45,000 and the top threshold of the 32.5% bracket will rise from $90,000 to $120,000.
While the government has also been leaving open the option of bringing forward stage three of its tax plan scheduled for 2024-25 – the most controversial stage that reduces the tax rate for those earning between $45,000 and $200,000 to 30 cents in the dollar – the guidance on budget eve was that would remain as originally scheduled.
When it comes to business, there are many ways to deliver a boost. In previous years the government has allowed write-offs of capital expenses in the first year they’re incurred and cut the corporate tax rate to 25%.
A further boost could be delivered by expanding the instant asset write-off, or creating an allowance that lets businesses claim a tax deduction of 120% of the cost of an investment. The government has also signalled it may reverse changes to the research and development tax concessions, which were due to be slashed by $1.8bn.
Labour market programs will be pivotal after the government reduced the coronavirus supplement on the jobseeker unemployment benefit and tapered the rate of jobkeeper wage subsidies. Reports have suggested jobkeeper, a program that pays employers to retain current employees, will give way to incentives and subsidies for hiring new employees.
Are there other policy problems to solve?
Yes. One is research funding for universities, which is at a low ebb because of the massive drop-off in international student revenue. Universities have suggested bringing existing research funding forward from 2024 to 2021 would be useful as an emergency stop gap, but they’d prefer new money.
The huge hit to tourism during Covid-19 has also deprived farms of a ready supply of working holidaymakers to pick fruit. The government has flagged changes including expanding the seasonal worker program and incentives for young Australians and welfare recipients to pick fruit.
The economic statement will also include new spending on aged care services – likely a boost to home care packages.
What to look out for?
Rightly or wrongly, budgets are often judged by how big the deficit is. While the government has declared it’s prepared to spend what it takes, some in the Coalition have voiced concerns about the cost of economic supports. Future deficits will be a yardstick to judge how big the treasurer’s conversion is from fiscal conservative to Keynesian.
While focus may be on the record-level public debt, debt has never been cheaper and Australia has been borrowing at new cheap rates to finance old debt. As a result, despite rising debt, the interest bill may be set to shrink from the $18bn in the mid-year update before coronavirus.
The budget also sets out projections for major economic indicators including GDP, unemployment, wages growth, inflation and population growth.
Frydenberg has told us to brace for negative population growth, and nobody expects prices or wages to increase. GDP projections will tell us how quickly the government believes it can drive below its target of 6% unemployment, and whether it thinks budget measures can help achieve a rapid V-shaped recovery.
The government has touted expansion of gas production and electricity generation as a source for jobs growth by reducing electricity prices. Scott Morrison said last Thursday he couldn’t make “easy assessments” about the cost of pursuing the so-called gas-led recovery. We’ll keep our eyes peeled to see what, if any, support gas receives on Tuesday.
What measures have already been announced?
$7.5bn of infrastructure spending, which the Coalition claims is new money
A $3.5bn upgrade to the national broadband network, including to take fibre deeper into neighbourhoods serviced by fibre-to-the-node (FTTN) technology.
An extra $1.5bn for manufacturing, including a $1.3bn fund for grants to companies that co-invest to boost production in six priority areas.
$1.2bn for a 50% wage subsidy to create 100,000 apprenticeships.
$250m for tourism and regions consisting of: $200m for a fifth round of Building Better Regions grants, of which $100m will be for regional tourism infrastructure; and $50m to assist businesses in regions heavily reliant on international tourism.
$53m for the development and production of local film and television
Removal of the 47% fringe benefits tax on retraining provided by employers to redundant, or soon to be redundant, employees.
