Australia’s Iron Ore, Jobs Budget Windfall Allows Spending Boost
Australia’s fiscal windfall from iron ore soaring above $200 a ton and a tumbling jobless rate is set to narrow the budget deficit and deliver spending firepower to help push the economy toward maximum employment.
Treasurer Josh Frydenberg will announce in tonight’s budget an A$80 billion ($63 billion) deficit in the 12 months through June 2022, from A$152 billion this fiscal year, a survey of economists showed. That compares with Treasury mid-year estimates of A$108.5 billion and A$197.7 billion, respectively.
The government decided against early efforts of budget repair and will instead line up with the Reserve Bank of Australia in continuing to pump stimulus to drive unemployment as low as possible and revive inflation. Frydenberg’s pivot aligns with international counterparts, like Treasury Secretary Janet Yellen, who are also aiming to close output gaps in their economies.
“Australian policymakers appear determined to avoid the mistakes of the past -- specifically, the overly tight fiscal/monetary policy settings that contributed to the breakdown of wages growth and inflation during the mid-2010s,” said Andrew Boak, Goldman Sachs Group Inc.’s chief economist for Australia. The outcome is likely to “see economic policy settings remaining relatively accommodative for years to come.”
Australia benefited from early suppression of Covid-19 that continues to boost confidence, with business sentiment surging to record highs in April.
Unemployment fell almost 2 percentage points in eight months, to 5.6% in March, increasing the tax take and reducing outlays. In addition, the nation’s largest export is soaring: iron ore futures hit a fresh record $226 a ton Monday as producers struggle to meet rampant demand from Chinese steel mills.
Lofty commodities would typically fuel a surge in the Australian dollar. However, the RBA’s quantitative easing program is helping to keep a lid on the currency.
The bank says it doesn’t expect to raise interest rates until the unemployment rate is in the low 4s or even high 3s, or sufficient to lift wages and inflation. It doesn’t expect to achieve this until 2024 at the earliest.
Frydenberg, meantime, is expected to announce additional spending on roads and railways to support hiring and inject more cash into the aged- and health-care sectors. For equity markets, this means infrastructure, energy and health stocks will be of focus.
Economists predict Australia’s economy will expand at 4.1% in the 12 months through June 2022, before decelerating to 3% in the year after. They expect unemployment to decline to 4.5% by June 2023.
Australia’s new fiscal direction “is a paradigm shift from the austerity-focus the Coalition government maintained from 2013 to the Covid crisis,” Boak said.
“The political appeal of the new strategy remains to be seen, but we sense little appetite for fiscal austerity ahead of the next federal election to be held before May 2022,” he added.
©2021 Bloomberg L.P.