Citi's take on the Federal Budget 2021
The Federal Budget provides some targeted additional fiscal support, paid for by favourable parameter changes, until the government believes the economic recovery is secured. The new spending initiatives are measured and in total, unlikely to influence the conduct of monetary policy. That said, the budget is also a missed opportunity to embark on structural supply side reform to sustainably lift productivity and real wage growth.
As expected, the 2021 Budget delivered further fiscal support to economic activity rather than pivot towards a quicker return to budget repair. This strategy will remain until the unemployment rate is below 5 per cent. In our opinion, this is the correct approach given ongoing excess economic capacity, some sectors of the economy remaining scarred from ongoing international border closures and with monetary policy constrained by near zero interest rates. We welcome budget initiatives to allow further expensing of business depreciable assets, address failures in the aged care system, extend the low and middle income earner offsets and promote increased labour force participation.
Some of the policy initiatives may not be correct for the economic cycle. For example, policies that add to the demand for housing at a time of rapidly rising prices would have been better directed at increasing housing supply and boosting the supply of public dwelling stock.
In our opinion, the Budget could have prosecuted an argument for more structural supply side reforms to sustainably lift productivity and real wages growth rather than temporarily extend some existing programs. This is because the government’s forecast of lower population growth for longer may create new pressures to productive capacity that could influence the tax base and growth.
Parameter variation is unlikely to provide a further abnormally large windfall to government receipts in the future. Large further upside surprises to growth and commodity prices are unlikely from current activity and spot prices respectively because the economy has largely converged back to its pre-pandemic level of output. The x-factor for the government may come from ongoing very conservative assumptions on future commodity prices and nominal GDP growth.
Implications for monetary policy
The Budget’s incremental policy stimulus measures announced since the mid-year economic and fiscal outlook (MYEFO) are worth around 0.8 per cent of GDP in fiscal year 2022. This is very small and unlikely to influence the conduct of monetary policy. After this date, the budget estimates a gradual improvement in the deficit such that the incremental fiscal impulse over the forward estimates averages around -0.9 per cent of GDP, which is also within historical boundaries that have not concerned the Reserve Bank of Australia.
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