20 Oct 2020

Taking positive steps towards recovery.

Unconventional and unprecedented – the 2020-21 Federal Budget offers a set of measures designed to help Australia bounce back from COVID-19. While this budget rewrites successive government’s fiscal strategies and budget rules, there’s good reason.

Urbis’s Chief Economist Richard Gibbs states, “With the immediate focus on cyclical measures, this budget aims to drive a robust tailwind for the economy, to offset all the headwinds that continue on a global scale as COVID-19 runs its course.”

A number of the budget measures have already been legislated; there’s a surgical focus on cyclical initiatives rather than structural reforms; and the Australian State, Territory and Local governments are seen as best placed to deliver activity-based initiatives.

Urbis Director Nathan Stribley observed, “This budget is leaning into the most productive parts of the economy – focusing on the private sector and calling on businesses, incentivising them to invest and hire in what is largely an uncertain environment.”

This budget is leaning into the most productive parts of the economy.

Nathan Stribley View Profile

And while there’s a shift away from direct payments by investing deliberately in infrastructure, there is a big bet being placed on households increasing their spending and driving up consumption.

The first of these business investment incentives is the $27 billion business allowance and $5 billion company loss carry-back measure, which can work in conjunction. It’s the government signalling to business – now’s the time to invest for growth.

In terms of job creation, there’s a focus on young people, who we know are suffering at the moment, with a hiring credit for businesses to support wages and an expansion of the apprenticeship wage scheme.

“There’s also an R&D incentive that goes to the heart of innovation because we’ve known since 2011 that Australia hasn’t been spending enough on R&D. In fact, we’re actually falling behind our OECD peers,” said Mr Stribley.

While COVID-19 encouraged people to save rather than spend, this hasn’t played out evenly across the states. In Victoria, with stage four restrictions and a lengthy lockdown, expenditure patterns have been disrupted beyond the shock of COVID-19.

As households spend less on discretionary items and more on fresh food, less GST is captured, which could impact Victoria’s ability to fund its expenditure priorities. Whereas, in WA and Queensland, credit card and discretionary spending has not only come back but it has reached new peaks. This gives us optimism about the level of pent up demand within the economy.

There’s a personal income tax cut for low and middle-income earners across Australia. While it leaves out higher earners, it does offer a greater boost to consumption – lower income earners tend to spend a high proportion of discretionary income.

Small and existing projects, those already in the pipeline, are greenlit by this budget – to minimise the fiscal lag of getting money into the economy. There’s also an increase in road and rail funding – but of the $14 billion set aside, only four is for new work.

There’s a clear focus on regional projects, perhaps to alleviate the strain dealt to regional areas around COVID-19-provoked unemployment and to pause the pressure put on cities already busy with infrastructure work.

Beyond transport, there are funds for water, IT and digital technology projects – as well as the Clean Energy Finance Corporation, although the government has already asserted it is leaning towards gas in the near term as a transitionary fuel source.

The Commonwealth has raised the level of funding commitment within this budget, and we expect the states and territories to also go further in their upcoming budgets. It’s a use it or lose it deal. Whether these funds are committed on a full, partial or shared cost basis, these projects have to commence.

With our national borders used as a frontline defence against COVID-19, Australia will encounter our first net negative overseas migration result in almost a century as international students and others on temporary work visas ventured home.

In August this year, the ABS recorded just 50 international student arrivals to Australia when normally we’d welcome over 50,000. It’s expected that Australia will see around 650,000 fewer migrants by the end of FY 2022.

Urbis Director Nathan Stribley observed, “there’s no doubt there are both short and longer-term impacts to the population assumptions within the budget itself… we do expect migration to rebound as soon as we can get our borders open. Australia has been a shining light in terms of its pandemic response, and this will boost our international attractiveness.”

Other influences, including Australia’s declining fertility rate and significantly low replacement levels, all of which we’ve seen in previous recessions, may impact our ability to prop up the tax base and provide the workforce needed to support our ageing population.

We know that through net overseas migration, 75% of people settle in New South Wales and Victoria, with Queensland possessing the next largest share of immigrants. . In contrast with the eastern seaboard borders closed, states like Western Australia are primed to benefit from tides of people relocating.

Our states have felt the impact of COVID-19 differently. And while Victoria is likely to achieve a stable outlook, despite the loss of international students and fleeing retirees, best outcomes are anticipated in Queensland, WA and to a lesser extent SA.

“WA has done very well out of being its own microcosm, locking down its borders. For the first time in decades, it now has a captive audience in relation to arrivals, so it’s not losing population to other states,” said Mr Gibbs.

In terms of interstate migration, Victoria might face an unfavourable outlook. There’s growing anecdotal evidence to suggest that retirees and prospective retirees are already buying into south east Queensland and far northern NSW.

Victoria and NSW will also be disproportionately affected as a result of the decline and potential slump in stamp duties, particularly from residential properties – something to watch closely because it may impact the capacity of those states to respond.

While a budget can’t be all things to all people, it missed a few marks.

“It’s disappointing that one of our most productive cohorts – women – are being denied the opportunity to increase their economic participation due to childcare costs, and the effective marginal tax rate on women working more than three days a week,” said Mr Gibbs.

Let’s hope this is addressed in December.

It’s disappointing that one of our most productive cohorts – women – are being denied the opportunity to increase their economic participation.

Richard Gibbs View Profile

Higher education also could have done with more budget support – The funding announced was well received, but the loss of international students presents a real risk for the sector. So too with manufacturing, the funding announced was welcomed, but the investment required to support the pivot to a domestic focus is likely to exceed its capacity.

While there’s a clear focus on supporting the delivery of health and aged care services, there was insufficient support for social housing or the build-to-rent development model: the latter requires Commonwealth tax reform to attract significant foreign investment.

Tourism and leisure also lacked meaningful support, which is surprising given we know from parliamentary inquiries that intra-regional tourism at best will return the sector to ~15 to 20% of its pre-COVID-19 capacity – not enough to maintain current operators.

“We would also have liked to see more investment in energy and renewables, especially as we know from Urbis’ work on solar farms that these investments are big drivers of employment and energy certainty for regional areas,” said Mr Gibbs.

One definite winner was the digital and telecommunications sector which received $29.2 billion for the rapid expansion of the 5G network. “This is an important and favourable tilt towards agile working, providing more scope and agility for businesses as well.”

While the extent of our COVID-19 shock is such that a significant amount of government support, guidance and intervention is needed in the short-term, Australia has an enviable track record when it comes to being fiscally flexible.

“We have the scope to spend and the capacity to borrow at an extremely low cost – that’s why we’ve seen the government rapidly deploy income capital and health resources at an unprecedented rate across Australia and the economy,” said Mr Gibbs.

While we’re a small economy on a global scale, Australia has punched above its weight in its response to COVID-19.

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Urbis Future State Director Kate Meyrick stated, “while we’re a small economy on a global scale, Australia has punched above its weight in its response to COVID-19, particularly in providing fiscal support and accepting the trade-off between health outcomes and economic cost.”

Led by an unprecedented show of bi-partisan agreement through the national cabinet, Australia has committed a higher percentage of GDP to fiscal support than many of our global peers and maintained a much lower percentage of debt-to-GDP ratio.

And while the GFC disrupted the free movement of capital in Australia, COVID-19 has disrupted the free movement of people – and it’s this that has the potential to impact the growth of individual states and our broader population as we emerge from the pandemic.

Richard Gibbs View Profile
Nathan Stribley View Profile
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