2020 Budget in Review

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.”

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.

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.