Sarah Hunter, KPMG Senior Economist, responds to Budget speech

Tonight’s Budget confirmed the budget-positive impact of a stronger economic recovery. Together with a sizeable tailwind from elevated commodity prices, the underlying cash balance is now expected to come in at $80bn billion (3.5 percent of GDP) in 2021-22.
The government has chosen to use most of the budget upside to help ease cost of living pressures, with a modest improvement in the deficit, to $78 billion (3.4 percent of GDP), projected for 2022-23.

The centrepiece of these supports is a $420 per taxpayer increase in the Low and Middle Income Tax Offset, which will cost $4.1bn over the forward estimates in foregone revenue. Originally designed as a temporary measure, it now seems as though it’s politically too difficult to remove, but given the economy is currently firing on all cylinders there is a question about how much additional activity the tax cut will generate.

Other measures include a one-off payment of $250 to low-income households (in addition to the recent increase in many social security payments) and the fuel duty has been lowered by 22 cents per litre for six months, which comes into effect immediately. But as with the increase in LMITO, these measures risk stoking inflation over supporting additional activity. Altogether these measures will cost the budget $3.5bn in FY2021-22 and $5.2bn in FY2022-23.

The ‘usual’ areas for additional funding (in particular healthcare and infrastructure) have also been targeted, as has skills and training, cyber security, defence and home affairs – unsurprising given the heightened state of geopolitical tensions at the moment.
The budget was light on measures that would affect significant budget repair over the medium term, with no major tax reforms included – this is not unusual for a Budget preceding a Federal election.

The forward estimates continue to project a shrinking of the deficit to a manageable 0.7 percent of GDP by the early 2030s, but they are predicated on productivity growth recovering to 1.5 percent pa – Australia has not sustained this pace in 20 years, so future governments will need to implement a series of reforms across all parts of the economy to achieve this goal – in taxation, infrastructure, digital, competition and many other areas.


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