Australia to Tap Yellen’s Playbook in Fiscal Push for Jobs

(Bloomberg) --

Australia’s fiscal authorities are taking a leaf out of U.S. Treasury Secretary Janet Yellen’s playbook in deploying spending to push the economy toward maximum employment, a stance that keeps policy aligned with the Reserve Bank.

Treasurer Josh Frydenberg says he will deliver a “jobs budget” on Tuesday that’s expected to boost spending on roads and railways to support hiring and extend income-tax breaks for low and middle income earners to keep them spending. There’s also expected to be a major funding package for the employment-heavy aged-care and mental-health sectors.

“There’s certainly been a shift in the fiscal stance to a singular focus of getting unemployment as low as possible and that’s very consistent with what the RBA is doing,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “It’s also consistent with a global push toward full employment and returning inflation to central bank targets.”

Frydenberg’s enjoyed good fortune as a surge in hiring boosted the tax take and reduced welfare costs, and iron ore soared toward $200 a ton, bringing with it a windfall in tax revenue. The upshot is the deficit this fiscal year is expected to be only three-quarters of the size forecast in December and then almost halve again in fiscal 2022 to A$80 billion ($63 billion).

The improvement in the bottom line gives the treasurer scope to increase spending to solidify the recovery. It also dovetails nicely for a government that’s trailing in opinion polls and needs to hold an election in the next 12 months.

As part of its budget announcements, on Monday the government revealed a series of infrastructure investments for the states. This includes about A$2 billion for an initial investment in a new train-freight terminal in Melbourne and nearly A$3 billion for highway upgrades in New South Wales.

There’s also expected to be an A$18 billion aged-care reform package that will spearhead a major funding program for government services, the Australian newspaper said. This includes a new-generation workforce and record funding increases for mental health suicide prevention and people living with disabilities, it said.

“The budget strategy is to go for growth,” said Bill Evans, chief economist at Westpac Banking Corp. “What drives fiscal repair is having the economy operating closer to full capacity -- with revenue boosted by a higher employment to population ratio. Spending restraint may well gain less traction – if the economy gets stuck in the slow lane.”

Economists predict the economy will expand 4.1% in the 12 months through June 2022 and 3% in the fiscal year after that, with unemployment falling to 4.5% by mid-2023. The RBA, in forecasts released Friday, said that under an optimistic scenario the jobless rate could fall to 3.75%.

Meantime, net debt is expected to climb to A$731 billion by mid-2022 and rise again to A$806 billion by mid-2023.

The government’s decision not to prematurely proceed with budget repair has been praised by economists. Frydenberg’s fiscal blueprint tomorrow is also expected to announce a program to bolster retirement savings by expanding a program that allows older Australians to sell the family home and deposit a large lump sum into their superannuation, the Australian Financial Review said.

The move is aimed to win over votes from retirees -- a crucial electorate for the government -- and free up housing stock. Australia’s property market is surging in response to record-low borrowing costs, putting home ownership out of reach for many first-home buyers.

Pyrrhic Victory

Yet, the budget sweeteners could be wasted if Morrison isn’t able to accelerate the rollout of the Covid vaccine. Australia heavily trails counterparts like the U.S. and U.K.; indeed, Trade Minister Dan Tehan warned Friday that international borders might not be opened until the second half of next year.

That will hurt tourism and education, but also suggests Morrison could be in the uncomfortable position of campaigning for re-election while the rollout still in progress.

Ong says there’s potential for the fiscal debate Down Under to shift toward further spending, rather than restraint.

“You deliver this budget, then you get closer to whenever the next election is and use that as a springboard for more measures to support the labor market,” she said. “Whether it’s particular cohorts or more broadly to encourage the private sector to invest and hire, there’s multiple ways you could do it through the fiscal tool.”

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