Budget 2021-22 - What’s in Store?

Australian Treasurer Josh Frydenberg will hand down this year’s Federal Budget on Tuesday 11 May, solidifying Australia’s plans for the next phase of economic recovery from the COVID-19 pandemic. Pundits forecast this will be another stimulus-driven budget, dodging the traditional “tighten the purse” Coalition modus operandi.

Mr Frydenberg offered some insight to what we can expect in a pre-Budget economic and fiscal strategy speech he gave to the Australian Chamber of Commerce and Industry on Thursday 29 April. A commitment to lower taxes, small government, budget discipline and delivery of essential services remained core Coalition Government values, he said, although tempered by a commitment to avoiding the high economic costs of prolonged unemployment that had persisted after the recessions of the 1980s and 1990s.

In his 2020 Budget Speech, the Treasurer forecast that his Government would move to the second phase of its economic recovery plan once unemployment had stabilised at pre-COVID levels. “Once the recovery has taken hold and the unemployment rate is on a clear path back to pre-crisis levels, comfortably below 6%, we will move to the second phase where there is a deliberate shift from providing temporary and targeted support to stabilising gross and net debt as a share of the economy,” he said at the time.

Australia’s unemployment rate has already fallen to 5.6% according to the latest figures from the ABS released in mid-April. Granting the withdrawal of JobKeeper on 28 March does not push them higher temporarily, the Government hopes the overall downward trajectory to continue. Even with unemployment rate now below the level at which the Treasurer said phase two of the economic recovery plan would start, there are two main reasons that the Treasurer is expected to hold off on tightening the purse strings this year. First, the Government is very aware that the recessions of the 1980s and 1990s produced long tails of double-digit unemployment that took the best part of a decade to recover from. Second, this is a pre-election budget after all, with Australians headed to the poles by mid-to-late 2022. Winning votes aside, an austerity Budget now, and a possible pork-barrel Budget in 2022 would risk prolonged recession and seem fiscally irresponsible.

Josh Frydenberg used his pre-Budget speech to reassure Australia that the Government “won't be undertaking any sharp pivots towards austerity” with no plans to move to the second stage of its Budget repair strategy “until we are confident that we have secured the economic recovery”. More specifically, Mr Frydenberg said that he would draw on advice from the RBA and Treasury that “the unemployment rate will now need to have a four in front of it to deliver this outcome”. His speech highlighted that economic growth and sustainable delivery of higher real wages would depend on lifting productivity. Measures in this year’s Budget to boost productivity will likely include investment in skills, infrastructure, tax, energy, digital technology, and deregulation.

Economy

The 2021-22 Budget should benefit from better economic conditions than the Government expected in December’s Mid-Year Economic and Fiscal Outlook (MYEFO). According to Deloitte Access Economics' latest 'Budget Monitor', national income is projected to increase 1.6% ($31 billion) in 2020-21, 4.2% ($85 billion) in 2021-22, 4.9% ($102 billion) in 2022-23, and 5.2% ($114 billion) in 2023-24. This will boost the economy across all three drivers of Government revenue: jobs, profits and spending.

Lower unemployment rates are expected to boost the Government’s income tax revenue, while reducing expenditure on social support. Total revenue from personal income tax is expected to increase by $5 billion this year, and $14 billion next year as the economy recovers further. Similarly, improved economic conditions are expected to boost company profits, producing a projected additional $9 billion in taxes on corporate profits this year. Renewed consumer confidence has families spending again, so GST revenues are expected to exceed earlier forecasts, boosting revenue by $6 billion this year and $5 billion next year.

Overall, Deloitte predicts underlying cash deficit of $167 billion this financial year and $87 billion next year - $31 billion and $22 billion, respectively, better than Treasury forecast in December 2020. Matching fiscal deficits are $163 billion and $86 billion, respectively.

Unemployment

Business peak bodies are supportive of the Government’s plans to drive unemployment below 5%. "Ai Group welcomes today's comments by the Federal Treasurer setting a more ambitious target for unemployment and acknowledging the role of businesses in achieving this important national objective," Innes Willox, Chief Executive of the Australian Industry Group, said. "While making further inroads into unemployment may involve extra government spending, if successful it can also add to economic capacity and improve the budget bottom line in coming years. Most importantly, it will help address a range of social and economic disadvantages associated with joblessness." Ai Group has called for ongoing investment in skills and training though, with additional support for those at risk of becoming long-term unemployed.

The Australian Council of Social Service welcomed the Government’s commitment to reducing unemployment below 5%, while calling for a focus on reducing under-employment and long-term unemployment, and stopping “demonisation and blaming people for being unemployed”.

Deregulation

The 2021-22 Budget is expected to contain several new measures targeted at removing regulatory burden on business and improving the performance of regulatory bodies. On 20 April, Assistant Minister to the Minister for the Public Service Ben Morton announced a range of new deregulation measures. For an investment of $120 million in deregulation, the Government hopes to deliver reduced compliance costs to business of around $430 million per year. Regulatory technology (regtech) solutions including digitisation of existing processes and accompanying regulatory improvements are projects to streamline processes and reduce costs. The Government will optimise Health Products digital pathways, providing a single digital channel (the Health Products Portal) to manage applications to the Medical Services Advisory Committee and the Prostheses List Advisory Committee. New regtech options for the National Greenhouse and Energy Reporting scheme will streamline reporting for over 900 companies reporting on over 7,500 facilities every year.

Tax Incentives

Small brewers and distillers will receive a boost through $225 million in tax relief to support more jobs and investment in the sector. On 1 May, the Treasurer announced that, from 1 July 2021 eligible brewers and distillers will be able to receive a full remission of any excise they pay, up to an annual cap of $350,000. Currently, eligible brewers and distillers are entitled to a refund of 60% of the excise they pay, up to an annual cap of $100,000. This will align the benefit available under the Excise Refund Scheme for brewers and distillers with the Wine Equalisation Tax (WET) Producer Rebate.

Aged Care

In the aftermath of the Aged Care Royal Commission and COVID-19 outbreak in residential aged care facilities, the Government will be expected to take action to improve conditions and boost staffing in the aged care sector. To that end, the Australian Nursing and Midwifery Federation has launched a new national campaign calling for mandatory staff ratios in nursing homes, legislated requirements for clinical governance, leadership and expertise in aged care; legislated transparency and accountability for taxpayer funding for aged care providers; guaranteeing workforce capacity and capability; and registration for unregulated aged care workers. The campaign is being supported by the Australian Medical Association, who have also called for mandatory 24/7 cover for registered nurses in aged care homes. ACOSS has also welcomed the announcement of funding for care-sector jobs, warning that further tax cuts would undermine the Government’s ability to adequately fund quality services.

Telehealth

The COVID pandemic has produced unprecedented demand for telehealth services to ensure that people can see medical professionals while remaining COVID-safe. On 26 April, the Government responded to calls from the Opposition and the medical profession to extend universal telehealth services. Health Minister Greg Hunt announced an additional $114 million in the Budget to extend the Telehealth program to the end of 2021. The AMA welcomed the extension, but said it was a missed opportunity to establish telehealth as a permanent feature of the Australian health system in a form which had greatest benefit for vulnerable and hard-to-reach communities, such as Aboriginal and Torres Strait Islander patients, nursing home residents, rural and remote patients and those with mental illness.

Rural and Regional Health

Rural and regional health professionals are hoping that this year’s Budget will reset the rural health system and deliver more doctors with the right skills to ‘Real Rural’ communities. “With an ongoing maldistribution of doctors between urban and rural areas, the time is right for the Federal Government to put in place stronger foundations for an improved rural health system going forward – and particularly to improve access to local doctors for rural communities,” Rural Doctors Association of Australia President, Dr John Hall, said. The RDAA called for additional funding for programs that give junior doctors rural training placements and experience, and better targeting of rural incentives that currently encourage rural doctors to work in large regional centres rather than small, isolated rural and remote communities.

Childcare

The high cost of childcare remains a pressing issue for working families. There are persistent structural disincentives that make it financially unviable for many parents to work more than three days a week. The Government has announced Budget initiatives designed to address this problem. On 2 May, the Treasurer announced an additional $1.7 billion investment in childcare to be released in this year’s Budget. Starting on 1 July 2022, the Government will increase the childcare subsidies available to families with more than one child aged five and under in childcare. This is projected to help around 250,000 families. At the same time, the Government will remove the $10,560 cap on the Child Care Subsidy, projected to benefit around 18,000 families. All up, the changes are expected to allow working parents across Australia to add up to a total of 300,000 work hours per week - the equivalent of around 40,000 individuals working an extra day per week. This is projected to boost GDP by $1.5 billion per year.

The proposed changes have been well received by businesses of all sizes. Jennifer Westacott, chief executive of the Business Council of Australia, said the policy solves the problem of access to childcare, making it more affordable for low- and middle-income earners, reducing disincentives for people to take on extra hours at work. Ms Westacott said that while the Government’s announcement had solved the biggest problems, quality, pricing and skills shortages remained pressing issues for the childcare sector. The Council of Small Business Organisations of Australia was similarly supporting of the childcare package, saying that it would have profound positive effects on the current employment challenge and deliver benefits to working parents, families, and small businesses alike.

Labor was less positive about the plan, saying that hundreds of thousands of families would miss out, with the plan only lifting the childcare subsidy rate for families who have a second or subsequent child under five years old in the system.

Community Services

ACOSS has called for the Budget to provide financial support for Australians suffering energy hardship. According to the Australian Energy Regulator, the number of residential gas and electricity customers in debt at the end of December 2020 has increased 32% in 12 months, from 147,098 in December 2019 to 171,329 in December 2020. The average residential gas and electricity debt at the end of December 2020 was $1,008, which steadily increased from $796 for the same period the previous year. People experiencing financial hardship are facing several difficulties at once: the end of JobKeeper and other income support, increasing rents, the end of eviction moratoriums, and the end of energy debt deferral safeguards. “To date most people have had some safety net with COVID-19 financial support and the ability to defer energy debt, but this is all coming to an end and the consequences for some people as we go into winter are dire,” ACOSS CEO Dr Cassandra Goldie said. “We are calling on the Federal Government to provide financial support of up to $1,000 per customer experiencing payment difficulties via an emergency payment. As this measure will help relieve debt for energy retailers, we expect retailers to also step up and provide additional relief to those customers with debt greater than $1,000, and help customers reduce their bills going forward.”

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