Australia to Run Economy Hot in Budget Geared to Jobs Blitz

(Bloomberg) --

Australia will run its economy even hotter, joining the U.S. and Europe in holding open the fiscal spigot in tandem with monetary policy as they try to drive down unemployment and revive inflation.

Treasurer Josh Frydenberg’s 2021-22 big budget spend aligns both economic orthodoxy and the political needs of a government with an election due in a year. The deficit in the 12 months through June 2022 will be A$106.6 billion, or 5% of gross domestic product, exceeding economists’ A$80 billion estimate. That reflects higher outlays for infrastructure, aged care and tax breaks.

“We are better placed than nearly any other country to meet the economic challenges that lie ahead,” the treasurer said in his speech to parliament Tuesday evening. “Australia’s economic engine is roaring back to life.”

Frydenberg is joining international peers such as U.S. Treasury Secretary Janet Yellen in a spending bonanza designed to try to drive the jobless rate down to levels rarely reached in the past half century. His program is being buttressed by the Reserve Bank of Australia record-low interest rates, yield target and bond-buying program that aim to break a prolonged run of weak inflation.

While the government is spending big, it has given itself some wriggle room for later upgrades to the budget position by taking very conservative iron ore and jobless rate forecasts.

Treasury estimates iron ore will fall back to $55 a ton by the end of March 2022, from more than $200 a ton at present. It also sees 4.75% unemployment in June 2023, a quarter percentage point higher than the RBA’s latest estimate.

The budget acknowledges “upside risks” for commodities as industry liaison suggests iron ore could remain elevated for an extended period. “Meanwhile, a stronger recovery in steel production outside of China could also provide further support for iron ore and metallurgical coal prices,” it said.

The Australian dollar was little changed after the budget’s release and traded at 78.42 U.S. cents at 8:43 p.m. in Sydney.

The conservative government’s reorientation to becoming a big spender is a dramatic turnaround from just 18 months ago when it was driving toward the first budget surplus in a decade. At the time, Prime Minister Scott Morrison was dismissing calls for additional fiscal measures to support a relatively weak economy.

In that spirit, the government has set aside concern about debt for now, reflecting low borrowing costs and a better starting position than global peers.

Net debt is expected to be at 34.2% of GDP in June next year and peak just shy of A$1 trillion in June 2025, or 40.9% of GDP. That’s about half the U.S. and U.K. levels and about one-third of Japan’s, according to the Australian government.

Yet the road to an election by next May is clouded by a sluggish vaccination rollout. The budget assumes overseas borders will remain closed until the middle of next year, suggesting Morrison will be campaigning for another term while the rollout is still unfolding.

Another year of hardship for tourism and education is reflected in the budget allocating A$2.1 billion in support for aviation, tourism, the arts and international education providers.

Middle-Size Country

“These incentives alone won’t be enough to secure our economic success,” the Australian Chamber of Commerce and Industry said after the budget’s release. “We are a middle-sized country and rely on open borders -- we need to address our international border restrictions by gradually reopening international travel.”

Among other key spending items in Frydenberg’s fiscal blueprint are:

• A$7.8 billion to extend tax relief to low- and middle-income earning Australians
• A$20.7 billion for the extension of a temporary program for expensing and loss carry-back for assets bought by firms that has already supported a rebound of machinery and equipment investment
• A$15.2 billion in new commitments for road and railway projects across Australia
• $17.7 billion for the employment-intensive aged care sector; and
• A$1.9 billion for the Covid-19 vaccination strategy

The fiscal recovery outlined in Australia’s budget is occurring as expected, but downside risks remain, underpinning our negative outlook on Australia, S&P Global Ratings said today.

“The negative outlook on Australia reflects a substantial deterioration of fiscal headroom at the ‘AAA’ rating level and our view that risks remain tilted toward the downside,” it said in a statement.

Australia’s success in navigating the economy through the pandemic is clouded by a downward spiral in ties with its largest trading partner, China. Last week China announced it was suspending a ministerial economic dialog, while Australia is reviewing whether to force a Chinese company to sell a lease to a strategically significant port used by the Australian and U.S. militaries.

The budget papers acknowledged the threat in a thinly-veiled reference. “Ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports,” they said.

The government also faces increased pressure to step up efforts to cut greenhouse gas emissions as a consensus emerges among developed nations led by President Joe Biden.

The budget response is limited. It sets out A$1.6 billion for priority clean energy technologies.

Still, the domestic economy is set to roar and the Australian electorate historically reward governments that demonstrate strong economic management. Treasury forecasts GDP will rise 5.25% this calendar year, before cooling to 2.75% in 2022.

“The outlook remains positive, though considerable risks remain,” the budget said. “Australia’s success in containing the health crisis to date has underpinned the economic recovery, but continued growth will rely on the effective containment of any Covid-19 outbreaks in Australia, including those that may arise from any new strains of the virus.”

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