Detailed Review of the 2021-22 Federal Budget
At a glance initiatives
At a glance announcements for SME's
Summary of Australia's fiscal position following COVID-19
The 2020-21 Federal Budget was handed down in October last year following the bulk of the economic impacts of COVID-19. While there were signs of an economic recovery, the nation was still plagued by the uncertainty of further lockdowns and the active roll-out of an effective vaccine. Accordingly, the economic outlook remained suppressed. At the end of 2020-21, unemployment was originally expected to be 7.3% following an economic contraction of 1.8% (real GDP).
However, what followed was a period whereby negative expectations were not realised, while the level of positive expectations was exceeded. Namely, an active vaccination program commenced in the third quarter of 2020-21 (albeit slowly) as business and consumer confidence recovered sharply. As a result, revisions released last night estimate that the economy has instead grown slightly in 2020-21 (+1.25%) and is expected to rebound more sharply in the coming financial year (2021-22; +4.25%). Additionally, and likely supported by the government’s commitment to jobs in the current budget, unemployment was revised to 5.5% this year (currently at 5.6% in March) and is anticipated to fall to 4.5% in 2023-24.
Real GDP Growth
Consumer Price Index Growth
Wage Price Index Growth
Nominal GDP Growth
Source: 2021-22 Federal Budget, Statement 2: Economic Outlook.
With stronger economic performance also came positive revisions to the Federal Government’s fiscal position. Specifically, thanks to improved tax revenues and fewer welfare payments, the projected government deficit for 2020-21 was revised down to $154.5 billion. The latest revision will only slightly reduce the austerity burden on future generations stemming from necessary stimulus injections. This suggestion stems from consideration for the budget surplus that was previously projected for 2019-20 and onward in the pre-pandemic budget. Instead, compounding government deficits are expected to amount to more than $500 billion between the 2020 and 2025 financial years.
Source: 2021-22 Federal Budget, Statement 3: Fiscal Strategy and Outlook.
What more did CCIQ Advocate for?
Further reform of Australia’s tax and transfer system to stimulate jobs
Payroll Tax – Calling on the Commonwealth to play an active leadership role through the Council of Federal Financial Relations to assist state governments in reform efforts. More flexible horizontal fiscal equalisation will be necessary to adjust for immediate revenue losses. WHY?:
- Queensland businesses ranked payroll tax as the largest priority for the 2021-22 State and Federal budgets.
- At $4.2 billion of revenue in the 2020 FY, the value of Payroll Tax in Queensland is equivalent to approximately 50,000 full-time equivalent jobs.
Fringe Benefits Tax - During the economy’s recovery from COVID-19, remove FBT on entertainment-related expenses and activities directly related to attending work to stimulate consumption and support employment in sectors hardest hit by COVID-19 trading restrictions. WHY?:
- The retail, accommodation and hospitality industries reported the lowest level of overall confidence at the peak of the COVID-19 crisis.
- Businesses in CBD areas are still reporting challenges stemming from suppressed foot traffic.
Promote further efficient infrastructure investment
2032 Olympics Infrastructure – Opportunity for the Federal Government to take a longer-term focus on investment in productive infrastructure, including those necessary for the 2032 Olympic games. WHY?:
- Of the infrastructure projects announced, Queensland received the lowest on a per capita basis
- Queensland’s population is expected to resume its strong upward trend when COVID-19 travel restrictions are eased. In Australia, population is expected to rise from nearly 26 million to 30 million by 2030.
- Fast-tracking projects, particularly transport infrastructure, would have immediate productivity benefits for Queensland businesses. This would also provide more opportunities for economic activity throughout the recovery phase.
What are the key assumptions underpinning the forward estimates?
1. International borders are assumed to reopen in the latter half of 2021-22
2. The exchange rate is assumed to remain at AUD:USD of $0.77
3. Interest rates are assumed to move broadly in line with market expectations
4. Population growth is estimated to be:
5. Iron ore prices assumed to decline to US$55/ tonne by the end of the March quarter 2022
- Iron ore current trading at US$228/ tonne
6. Metallurgical coal spot price assumed to remain at US$112/ tonne
7. Thermal coal spot price assumed to remain at US$93/ tonne
Written by Jack Baxter, CCIQ's Economist