Economy bounces back but private investment shortfall looms
The Australian economy has bounced back from the COVID-induced economic downturn faster and stronger than all expectations. This has pulled back Commonwealth Government deficit forecasts for FY2020-2021, however the total deficit over the next three financial years is higher compared to last year’s budget and MYEFO.
The mix of good management and good fortune that has enabled Australia, so far, to experience relatively few cases of coronavirus has also meant our economic recovery has been much stronger than previously forecast. Much of that recovery can be put down to the highly effective, but very expensive, economic policies and support programs put in place by the Commonwealth and State Governments.
The big ticket fiscal policies of JobKeeper, JobSeeker, JobMaker, HomeBuilder, combined with the suite of monetary policy responses – including setting the cash rate to the effective lower bound, initiating Quantitative Easing (‘QE’), creating the Term Funding Facility – have all collectively built the ‘bridge to the other side’ of the COVID-19 crisis, albeit that the global pandemic is still far from being over.
However, except for public services, health, financial services and utilities, most sectors within the economy remain at below pre-pandemic employment levels. It is this spare capacity in Australia’s labour market that remains the target of the Commonwealth Government and RBA, with expansionary fiscal and monetary policies set to remain until headline unemployment falls into the 4 percent to 4.5 percent, or even lower. It is anticipated this level of unemployment will create wage inflation, and the activity driving this labour demand will push generalised inflation back towards the RBA target band of between 2 percent and 3 percent.
The Budget forecasts have suggested these unemployment and inflation targets are expected to be realised in FY2023-2024, but to get there government spending will have to remain at elevated levels at around 27 percent of GDP, a relative spend not seen since the 1982/83 recession; and the RBA will be simultaneously adding billions of cash into the economy via QE. While these measures may ‘get us there’, KPMG’s key question is whether such measures will ‘keep us there’ in terms of wages growth and inflation.
Driving up nominal wages and inflation concurrently does very little to real wages; as it is real wage growth that creates improvement in living standards and social prosperity. The only way to lift real wages is through improvements in productivity; something that has stalled in Australia in recent history.
Tonight’s Budget includes some useful productivity-enhancing expenditure, including childcare reforms, aged care reforms, additional infrastructure spending, women’s health and security measures, and various digital economy measures, but ultimately, they will not be enough. Australia needs more private sector investment, particularly in hard and soft business assets, that create long term sustainable jobs for our work force. Government’s role needs to be one that supports and incentivises business to do this because the market opportunities are there or are expected to be there. This could have been a stronger theme in this Budget.