Australia Fires Up Fiscal Policy in Race to Revive Employment
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Australia unveiled a multi-pronged fiscal plan that pushes its budget deficit to levels unseen in peacetime in a bid to power a recovery and generate jobs for tens of thousands left unemployed by Covid-19 containment efforts.
The underlying cash deficit will swell to A$213.7 billion ($153 billion), or 11% of gross domestic product, in the 12 months through June 2021, Treasurer Josh Frydenberg told parliament Tuesday. The jobless rate is forecast to peak at 8% later this year, a level last recorded 22 years ago amid the Asian financial crisis.
“This is a once-in-a-century shock that requires an unprecedented level of support,” Treasury said in its budget papers. “The government’s response is now transitioning to ensure the Australian economy recovers strongly by targeting additional temporary support measures to boost household incomes, bring forward business and infrastructure investment activity, and drive the unemployment rate back down.”
The right-leaning government has cast aside traditional fiscal restraint as it works to pull the economy out of its first recession in almost three decades. Australia entered the crisis relatively well placed to respond, with net debt standing at less than a quarter of GDP vs an average of over 80% in advanced G-20 economies.
“There is no economic recovery without a jobs recovery. There is no budget recovery without a jobs recovery,” Frydenberg told lawmakers. “This budget is all about jobs.”
Under its program, net debt will peak at 43.8% of GDP in June 2024 — from 24.8% last fiscal year — and the bond market will swell beyond A$1 trillion after July 1, 2021.
Spending measures include:
- Bringing forward tax cuts scheduled for 2022 to July 1 this year that will see the threshold for the 32.5% rate lifted to A$120,000 from A$90,000
- Allowing most firms to write off the full value of any eligible asset they purchase for their business; they can also offset losses incurred to June 2022 against profits made in or after fiscal 2018-19. Those two measures are expected to help create an additional 50,000 jobs
- Together with what’s been announced since the onset of the crisis, the budget will see A$14 billion in new and accelerated infrastructure projects, estimated to support a further 40,000 jobs. Funding for “shovel ready” projects will be provided on a use-it-or-lose-it basis that means if one state delays, another will get the money, in order to inject urgency
- A hiring credit paying A$200 a week to firms that take on an employee under 30 and A$100 for those aged 30-35
- An expansion of assistance to first-home buyers to try to drive the labor-intensive residential construction industry
- A Women’s Economic Security Statement including A$240 million for programs such as supporting women in science, technology, engineering and mathematics
“Australians will have more of their own money to spend on what matters to them,” Frydenberg said.
The Australian dollar was little changed, trading at 71.53 U.S. cents at 7:45 p.m. in Sydney.
Frydenberg is operating a two-stage fiscal plan as he tries to resuscitate growth, setting up a spending spree ahead of an election due by mid-2022. At that time, the government predicts unemployment will be 6.5%, while economists estimate it will still be around 7%.
Australia’s central bank is aiding the government’s largess by operating a bond-buying program keeping borrowing costs low across the economy and ensure the government can access funds at good rates. It kept policy rates unchanged earlier Tuesday, saying it continues to mull options and that addressing the high rate of unemployment is “an important national priority.”
Australia is assuming state border restrictions imposed to stem the spread of Covid-19 will be lifted by the end of 2020, bar Western Australia, which is assumed to open in April next year.
A gradual return of international students and permanent migrants is assumed late in 2021, Treasury said, with overseas travel expected to remain low through the period. With arrivals tumbling, net migration is set to swing to 72,000 people leaving Australia by June next year with a return to growth after that.
These are crucial factors for education and tourism, the fourth- and fifth-largest exports and major employers. In addition, the slump in migration is set to erode demand in the housing market.
High prices of the nation’s largest export, iron ore — as China deployed stimulus to re-energize its economy — has been a buffer for the local budget. The metal is currently trading well above $100, and Treasury is lowballing its forecasts, expecting it to be $55 by mid-next year.
The budget’s forecasts are based on the exchange rate remaining around its recent levels: a trade-weighted index of around 62 and around U.S. 72 cents.
— With assistance by Cynthia Li
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