This year’s Federal Budget is one of the most extraordinary we’ve had since the second world war, as the Australian government navigates a post-COVID recovery. An ‘eye-watering’ $213.7 billion deficit (11% of GDP) is forecast as spending is ramped up and tax cuts brought forward. Will all of this be enough to reboot the economy and what does all of this mean for investors?
The key measures
There were few surprises on Budget night as most measures had been flagged by the Treasurer prior. There was a shift in focus from providing immediate life support to the economy to announcing incentives to lift employment and capital spending as the economy moves out of intensive care and towards rehabilitation.
Finally, these measures have to be paid for. As a result, net debt is more than double what was forecast in the December 2019 outlook, rising to around 44% of GDP. However, this is still better than most developed countries. However, the risk is that at some stage higher interest rates will make this level of debt unsustainable.
The challenges ahead
Over the medium-term the challenge remains to try and stabilize deficits and debt out to 2025. Australia’s debt will remain well below most other advanced economies, but a plan needs to be established to plug the outflow of spending by unwinding the temporary support measures and maximise workforce participation and productivity.
While interest rates are currently very low, we can’t assume this will continue over the next five to ten years. Lower immigration and possibly lower commodity prices could also make it hard to see Australia return to balance let alone a surplus.
The biggest challenge going ahead is to change the course of the Australian economy and little progress has been made during this Budget in this regard. Even as the pandemic recession starts to subside, we believe the globalised trade and investment world of the last 20 years is likely remain under severe pressure.
US domination is likely to continue to retreat with many more players looking to set the investment and trade rules. This means Australia must stand ready to re-adjust growth drivers from commodity exports, re-establish key strategic supply chains domestically, boost national security, develop diversified and new energy sources and re-invigorate investment in infrastructure and skills. The budget did little to address this challenge and our sense is that much more spending will be required above and beyond these announcements.
What does all of this mean for investors?
If everything goes to the relatively optimistic plan laid out in the budget the Australian economy will recover and it will particularly benefit domestic demand, especially construction and retailers. However, with current very low interest rates retirees face a major challenge to produce returns that will deliver a comfortable retirement.
The budget is underpinned by the belief by using low rates to support business hiring and investment will boost productivity, growth and investor returns. Clearly this depends on confidence improving in order to put the enormous pools of savings to work across the business and household sectors that are underpinned by the explosion in government borrowing. Whilst this strategy carries risks it is hard to see an alternative other than placing the economy on life support for multiple years.
Overall, the budget makes progress on building a bridge through to 2024 for jobs and investment. However, the economic forecast shows that more needs to be done and the RBA will need to deliver more stimulus to gain confidence the forecast can be met. On the positive side we can address our shorter-term challenges, but further action will be needed if Australia is to be well-positioned in the post-pandemic world.
Speak to your adviser if you have any questions on how the Budget changes may impact on your personal financial situation.
As with every budget, the government announcements outlined are proposals only and need to successfully pass through Parliament before becoming law. Announcements may be subject to change during this process.
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