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Budget could be $200bn better off despite stimulus spending

Cameron Micallef
29 April 2021 1 minute readShare

A near record-high rebound in employment, business profits recovering and asset price booms are predicted to see Australia’s budget rebound by $200 billion even with an increase in government spending, an industry expert has revealed.

With the budget predicted to be a tax sweetener for voters ahead of a federal election, analysis by UBS has revealed that it is unlikely to have an impact on Australia’s bottom line. 

UBS economist George Tharenou predicts a more rapid than expected decline in JobSeeker recipients, led by a rise in employment and strong commodity prices which are leading to a faster than expected recovery.

“If the momentum continues for the rest of 2020-21, the deficit will be up to $50 billion smaller than expected. However, we allow for a conservative forecast and new policies, so we forecast the budget will present a $35 billion improvement,” Mr Tharenou said.

The economist pointed to the strong employment-to-population ratio, which is nearing record highs, as well as a business profits and asset prices boom, which Mr Tharenou opined has limited the long-term impact of the economic downturn.

“Hence, it’s plausible the budget will project a return to balance in 24/25, with a cumulative improvement of $200 billion across the profile,” he said.

Westpac chief economist Bill Evans agrees, highlighting 2021 will be a big year for stimulus despite Australia’s stronger than expected job figures.

“The labour market needs to remain “tight” for some time before the upward pressure builds on wages. So, while the unemployment rate might now be forecast to reach 4.5 per cent by mid-2023, it is still 0.5 per cent away from even reaching full employment and those ‘tight’ conditions,” Mr Evans said.

He noted that policymakers will be looking for strong wage growth before they look to reduce stimulus, but pointed out this is unlikely until the second half in 2024.

“There may well be pockets of wage pressure in 2022 as closed borders squeeze labour supply in some sectors.

“Policymakers are likely to look through those short-term pressures both on wages and, arguably, prices until borders reopen and labour supply is re-established. It is for these reasons that we think monetary policy in 2021 will remain fully committed to stimulus,” Mr Evans explained.

The big four bank’s economist believes strong iron ore prices and improvements in labour markets will lead to a stronger budget position, with the government likely to capitalise on its improving starting point for the deficits in 2020-21 and 2021-22.

“That will provide ample scope to initiate policies to sustain strong support for the economy, the economist predicts.

“Initiatives around personal tax, child care, aged care, energy and education should see significant boosts to spending in the federal budget on May 11,” Mr Evans concluded.

Budget could be $200bn better off despite stimulus spending
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Cameron Micallef

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