Australia Fires Up Fiscal Policy in Race to Revive Employment

(Bloomberg) --

Australia released a fiscal blueprint that pushes debt and deficit to a peacetime record just hours after the central bank signaled a willingness to ease further as both arms of policy press to drive down unemployment.

Treasurer Josh Frydenberg delivered a budget to parliament Tuesday evening in Canberra that forecast a shortfall of A$213.7 billion ($152 billion), or 11% of gross domestic product, in fiscal 2021. The jobless rate is expected to peak at 8% late this year, a level last seen in 1998 amid fallout from the Asian financial crisis.

“There is great uncertainty, unprecedented uncertainty in the economic environment not just here in Australia but globally right now,” Frydenberg said after handing down the budget. “What we have sought to do is create a series of incentives and make a series of investments that are designed to create more jobs. There is a record amount of spending but also important supply side structural reforms.”

The government’s financial position has been significantly improved by Reserve Bank efforts to drive down yields -- to such an extent that debt repayments will be lower in 2023 than they were in 2018. Governor Philip Lowe adjusted his language in Tuesday’s statement to say the RBA is considering how additional easing -- as opposed to additional measures -- could support jobs.

“The board views addressing the high rate of unemployment as an important national priority,” Lowe said after keeping the cash rate and yield target unchanged at 0.25%. “It will maintain highly accommodative policy settings as long as is required and will not increase the cash rate target until progress is being made towards full employment.”

Frydenberg echoed those sentiments in his budget speech to parliament: “There is no economic recovery without a jobs recovery. There is no budget recovery without a jobs recovery. This budget is all about jobs.”

The right-leaning government has shelved its traditional fiscal rectitude as it tries to extricate the economy from 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 versus an average of over 80% in advanced G-20 economies.

Australian 3-year yields touched a record low 0.12% versus the RBA’s 0.25% target, after the budget deficit and planned bond issuance turned out to be less than estimated.

Under the government’s 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.

“We are providing very substantial, historically unprecedented stimulus into the economy,” Finance Minister Mathias Cormann said in an interview with Bloomberg Television Wednesday.

“Jobs before this crisis, and when we get beyond this crisis, will overwhelmingly be created by successful, profitable private sector businesses,” he said. “That is the situation we need to get back to.”

Budget measures include:

• Bringing forward tax cuts set for 2022 to July 1 this year that 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
• The budget will see A$14 billion in new and accelerated infrastructure, 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
• 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

What Bloomberg’s Economists Say

“The budget’s economic projections highlight that fiscal policy support is too small, and is being withdrawn too soon. The best evidence of this is the unemployment rate, which is expected to remain above already disappointing pre-Covid levels for 4 years, with the government expecting a weaker recovery in jobs than the 1982-83 recession. Monetary policy was already doing much of the heavy lifting, in our view the budget locks in the reality that further easing will be required.”

James McIntyre, economist

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 sees unemployment at 6.5%, while economists estimate it will still be around 7%.

Australia has been aided by high prices for its largest export, iron ore -- as China deployed stimulus to re-energize its economy. The metal is currently trading well above $100, and Treasury is lowballing its outlook, expecting it to be $55 by mid-next year.

But the economy has been hamstrung by border closures inside the country and a bar on most international people movement. The budget assumes 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.

Government data Wednesday showed that in the month to Sept. 19, payroll jobs fell by 0.5% in Victoria, which is just beginning to emerge from a renewed Covid lockdown, and 0.1% in the rest of Australia.

©2020 Bloomberg L.P.