BUDGET 2021: fiscal policy is back

Published May 11, 2021

Fiscal policy is back.

This budget really is about finding the economy's limits.

First of all, this is a very stimulatory budget. We expected stimulatory. This is very stimulatory.

We thought there would be $A40 billion to $A50 billion in additional expenditure over the next five years. We've got $A95 billion or thereabouts. Roughly double.

If we look at expenditure as a share of GDP budget expenditure, aside from 2020, during the pandemic and economic crisis, this is the second-highest level of expenditure ever. It is very, very stimulatory.

If we look at what the government's done with the budget deficit numbers, most of the improvement in the budget balance has come from the surprisingly improved economy. Now a lot of that contribution to better balance has gone out the door through additional expenditure.

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The second issue is the range of policy measures covers a very broad spectrum - for example extending some of the instant asset write offs for the business sector. There are a few measures in that vein which are designed to deliver growth.

There are also efforts to do things around education, the household sector, around health, and particularly in an effort to at least to do something about equity in distributional outcomes in the economy.

And the third issue is thinking about the policy stance overall because, of course, policy is not just about fiscal policy - it's about monetary policy as well.

If we look at those two together, I can't recall a time where Australian policy settings have been so stimulatory - maybe 1993 coming out of the last recession in Australia, nearly 30 years ago. But, at that point, unemployment was above 10 per cent. Today it's 5.6 per cent and falling very, very quickly.

Pre-COVID, I was very worried about secular stagnation in Australia. I think if you're asking policy to try and tackle secular stagnation, you couldn't be asking any more from fiscal and monetary policy in Australia. At this point, they're both working very, very hard.

I don't think the economy will feel anything like it's suffering from secular stagnation in the next couple of years. I think we will get continued good economic growth, falling unemployment. I think business investment will come back.

And I think you'll find wages and inflation pick up more quickly than both Treasury and the Reserve Bank are expecting.

The bottom line for the economy is the Reserve Bank’s rhetoric of not needing rate hikes until 2024 is in sharp focus. I think financial markets and popular commentary will continue stress testing that view - and expecting it earlier than 2024.

Richard Yetsenga is Chief Economist at ANZ