Yahoo Finance The six graphs you need to see to understand Australia’s back-to-the-future federal budget
Oh, glorious recovery! Oh, a short recovery too. And, oh dear, those wages are set to remain low.
The treasurer, Josh Frydenberg, began his budget speech claiming “Australia is coming back”. Alas, he seems only too correct.
Related: The 2021 federal budget reveals huge $311bn cost of Covid to Australian economy
Yes, the sharp and deep pandemic recession is behind us, but what we have come back to is the same middling economy that we had before Covid-19.
The budget balance is better – for all the good that represents. Gone of course is the talk of budget surpluses. And I think at this time we should say a silent prayer for the 2017 budget, which was the first to make a prediction about the budget surplus for this current financial year.
Back then Scott Morrison suggested we would be now enjoying a surplus of 0.4% of GDP. It ended up being a deficit worth 7.8% of GDP. But hey, what’s $170bn between friends?
Yet really who cares? Because even though the budget deficit in both this year and the next is smaller due to a much better economic performance than expected, in 2023-24 and 2024-25 the government forecasts bigger deficits than it did in last year’s budget.
That’s not bad – it suggests the government’s spin around it not being an austerity budget is largely true – but it also rather dents its ability to talk about the budget balance being an indicator of economic management.
The wild fluctuations of the pandemic make it is difficult to discern what is going on when looking at the growth figures.
For example, the budget predicts our economy to grow by 4.5% in 2021-22 – a stonkingly good result. But given that it comes off the back of two years where our GDP shrank and then grew by just 1.25%, it’s not a real shock:
It is still better than other nations might be able to boast, but the tale of this budget for me is mostly in the following three years – for there we see a return to the weak growth of the past decade.
Yes, some of it has to do with lower population growth, but even by 2022-23 the government estimates our population will grow by 0.8% – marginally down on the 1.2% growth of 2019-20 but massively above the 0.1% growth this year.
Yet our economy is expected to still grow below the long-term trend of 2.75% to 3%.
Worse, the news remains ever-dismal for workers.
There are some good signs – the government is predicting unemployment will go below 5%. By June 2024 it expects 4.5% unemployment – the lowest since the global financial crisis.
And yet wages growth is expected to be dire.
Fortunately, the government has mostly given up the previously absurd prediction of past years:
The other good news is the government does expect slightly better wages growth than it did in last year’s budget.
But what the budget papers don’t note is that the Treasury now expects the link between wages and unemployment to get worse.
It used to be the case that an unemployment rate of 5% would see wages growing by about 3.7%. As I have long been noting, in 2016 a shift occurred that means wages growth is now lower for every level of unemployment.
Over the past five years an unemployment rate of 5% – as occurred in December 2018 – would see wages growing by about 2.3% each year.
Now, however, the budget predicts an unemployment rate of 5% in June next year, but wages growth of just 1.5%:
Not to worry, the budget suggests that in 2024 and 2025, “the lower unemployment rate and broader economic strength should see wages begin to pick up”. Wonderfully, this will happen despite the unemployment rate remaining steady.
And yet the budget only forecasts wages growth increasing to 2.5% at best.
That is well below the level the governor of the reserve bank, Philip Lowe, suggests is needed to get inflation consistently within the RBA’s 2% to 3% target band.
Despite this the government predicts inflation will grow by 2.5% in both 2024 and 2025 – effectively meaning wages growth will be negligible for years to come, and so too will be any chance of an interest rate rise.
The low interest rate rises are the hidden aspect of this budget.
Because the budget suggests that the fiscal stimulus is set to be unwound, even while the economy remains weak.
Thankfully, the government has increased the level of public stimulus it was planning for this coming year.
In last year’s budget it expected “public demand” (ie, the amount of government consumption and investment) would grow by just 2.5% in 2021-22. That wasn’t going to fly in a world with ongoing health fears and vaccination needs.
Now the budget expects public demand will increase 5% next year; but then it would be wound back to just 1.75% in the following year – that would be the lowest level of public stimulus since 2014-15:
Despite all the protestations about this being an infrastructure budget, the reality is that once we get past the big hit of this coming year, the government expects the private sector to power the economy.
This should not surprise, because, despite big talk about loving infrastructure, the level of total public sector infrastructure work is much lower than it was a decade ago as we came out of the GFC:
And so the budget, despite all the hype, really is a return to what was.
No, it is not an austerity budget, but it remains one where the government desires to get back to a state where it can reduce fiscal stimulus.
And it does this all the while forecasting a scenario where wages growth remains weak and the reserve bank will need to continue keeping interest rates at “emergency levels” for years and years to come.
