Dr Brendan Rynne, KPMG Chief Economist, gives his assessment of the Budget
The Government has gone ‘all-in’ with the Budget, betting on the private sector to pony up and drive the post-coronavirus economic recovery for the nation.
Treasurer Frydenberg has put the challenge out to the private sector to pull the flailing economy up by its bootstraps. He has done this through a broad suite of policy initiatives, including brought-forward personal income tax cuts, full expensing for depreciable business investments, wage subsidies to encourage the employment of new staff and reforming insolvency arrangements to aid businesses to continue to trade.
Underlying that rallying call is a fundamental belief that consumers and investors will look through the current economic haze and will react positively to the incentives put in front of them. The government cannot prop up the economy indefinitely and, through the Budget, seems to be flagging that now is as good a time as ever to issue the challenge to the private sector.
The government is banking on a response that builds self-sustaining growth momentum. The fear has to be that the Budget concessions simply kick the can down the road – the sugar hit is short-lived, with economic activity brought forward but leaving a void in future demand.
This big bet is seen in the economic forecasts underpinning the Budget. Private final demand is forecast to kick-up in 2021-22 by about 7 percent after recording a fall of about 3.5 percent, while public final demand swings in the opposite direction, up about 5.75 percent and 2.5 percent in 2020-21 and 2021-22 respectively.
A consequence of the government-induced boost to private consumption and investment spending is an increase in inflation of 1.75 percent for this financial year and 1.5 percent for the next. It is highly likely we will see price increases in investment goods as businesses take advantage of the concessions offered in the Budget.
What is conspicuously missing from the Budget is any certainty around the outlook for Newstart payments beyond the end of this calendar year. The jobs mantra around which the Budget is framed cannot be faulted. However, confidence begets confidence; uncertainty begets uncertainty. Many people have lost jobs through no fault of their own and, despite the expansive incentives on offer to businesses to employ new staff, will remain unsure about their ability to successfully navigate the rapidly changing labour market. People without jobs, or who fear losing their jobs, will still have a cloud of doubt surrounding their financial future.
Unsurprisingly what is also missing from the Budget is a range of medium to longer-term policy options that push structural reforms and improvements to national productivity. Notwithstanding elements such as additional infrastructure spending and upgrades to the NBN, we accept that this Budget necessarily needed to focus on triaging the economic bleeding associated with this COVID-induced recession.
We strongly believe the government should be looking to next year’s Budget to roll out serious economic reforms, many of which can be readily found in the Productivity Commission’s 2017 “Shifting the Dial“ report.
We know that in times of previous global calamity, Australia has historically benefitted from opening its doors and using the skills and capabilities of migrants to help grow our nation faster than we otherwise could do by ourselves. A post-COVID world is likely to see migrants looking to move from countries that struggled to manage this disease to those countries that adopted policies which ensured relatively better health and economic outcomes for their residents. Australia is one of those ‘better’ countries, and we should therefore capitalise on our ‘good fortune and good management’ and consider how we can restart our foreign migration program.