What's the Government got cooking in its budget tomorrow?

author-avatar By on October 05, 2020
What's the Government got cooking in its budget tomorrow?

Source: Prime Minister Scott Morrison Facebook

After being delayed for six months due to COVID-19, the Government is set to deliver its budget tomorrow, with a $240bn deficit looming large.

UPDATE: Budget Details Here.

There is much speculation about what's going to be included in the budget. However, consensus is that the Government budget is in a deficit - a big one.

Westpac has forecast a $240 billion deficit, while AMP has forecast a similar $230 billion deficit.

JobKeeper, increased JobSeeker, $750 coronavirus payments, small business stimulus and more have all contributed.

Treasurer Josh Frydenberg has also signalled the Government will keep running at a deficit until unemployment is "comfortably" under 6%.

Both Prime Minister Scott Morrison and Mr Frydenberg also seem adamant on bringing forward tax cuts and bracket flattening, which could see middle-income earners better off by more than $1,000 per year - at the expense of Government revenues.

What can we expect to see in the 2020 budget?

Personal income tax cuts

Westpac's chief economist Bill Evans was bullish on bringing forward forecast 'Stage 3' tax cuts, originally slated for 2024-25.

"Such a move would be a strong statement from the government that it is serious with its efforts to boost demand through tax cuts," he said.

"The consensus view that the Stage 2 cuts will be brought forward to July 2021 and Stage 3 left until the legislated date of July 2024 represents an insufficient response on the personal tax front to the current crisis."

The Australian Bureau of Statistics' data indicates average full-time weekly earnings in Australia is $1,713.90, and lowering and flattening the marginal tax brackets would see these 'middle' income earners with about $100 a week more in their pocket.

These figures do not take into account any additional taxation, such as capital gains tax, HECS payments and so forth.

Stage 3 abolishes the 37c marginal tax rate, which would primarily benefit those earning more than $90,000 a year, while also lowering the 32.5c bracket to 30c.

This has led thinktank Grattan Institute to label Stage 3 as "poorly designed", as two-thirds of the benefits go to the top 20% of tax filers, who are "most likely" to save the additional income, rather than spend it.

Something for pensioners and the unemployed

Social services Minister Anne Ruston has indicated there will be a cash boost on the table for age pensioners, after indexation in September was scrapped following deflation.

The Combined Pensioners and Superannuants Association (CPSA) has called for a 'permanent pension hardship supplement' for the poorest pensioners, and singles without assets and without private income.

The CSPA has also called for a permanent increase to the JobSeeker payment, as has the Australian Council of Social Service. 

Continued support for small businesses

Various small business stimulus measures could also be extended or built-upon in Tuesday's budget.

Westpac's Mr Evans said extending the heightened instant asset tax write-off scheme could be "effective".

"These initiatives are likely to be increased and extended in the Budget. The write off for large investments could be increased from 50% while firms with larger turnover than $500,000 (annual) may be included," he said.

"The attraction of these policies, in contrast with company tax cuts, is that they can be targeted at boosting activity in the near term while not embedding permanent costs into the Budget."

Extension of HomeBuilder and social housing

The controversial HomeBuilder stimulus program, designed to prop up the flailing construction industry could get extended past its initial 31 December deadline.

Already at a cost of $680 million, state uptake of the program has been slow, and many individuals renovating fail to meet the $150,000 minimum threshold. 

Westpac's Mr Evans says it's "likely" the budget will include a boost to the scheme, along with a boost in social housing.

"Social housing is also likely to be significantly boosted. Large scale projects with long lead times often requiring environmental studies would not match the criterion of 'use it or lose it' that the government is expected to impose," he said.

Grattan Institute has also advocated for building social housing, recommending at least 30,000 new social housing units be built, at a cost of $10 billion.

The end of stamp duty and 'low hanging fruit'?

AMP's chief economist Shane Oliver said tax reform such as axing stamp duty is "low hanging fruit".

"Removing niggly taxes like stamp duty will help but to get a big productivity boost from tax reform would require a big shift away from personal and company tax towards the less distortionary GST – and that’s unlikely to get up politically," he said.

"Much of the low hanging fruit from industrial relations reform and deregulation has likely already been picked.

"While some production of medical essentials may be brought back onshore, a return to full-scale protectionism looks unlikely and would be counterproductive anyway."

However, at a National Press Club address on Thursday, the Prime Minister signalled a $1.5 billion boost to manufacturing, with one of the key areas being medicine - a sector that supports approximately 68,000 jobs.

How does Australia's debt compare globally?

Despite the pandemic wreaking havoc on Australia's economy and decimating the Government's balanced budget, Australia's debt and deficit are relatively low by global standards.

In Japan, for example, gross debt is in excess of 200% of gross domestic product (GDP).

In the United States it's around 130%, while in Europe it sits at nearly 100%.

In Australia, a $240 billion deficit represents 12.5% of GDP, according to Westpac.

Gross debt, as assessed by AMP, is 34% of GDP at $684.3 billion - the bank also predicts in three years' time, that figure will rise to $1.1 trillion, or 54% of GDP.

For reference, Australia's gross public debt peaked at 124% of GDP during the Second World War.

While these figures look huge, and they are, by global standards they are small, and there's not much to worry about according to AMP's Mr Oliver.

"Even with the projected blow out over the next few years it [debt] will still be relatively small," he said.

"So, it’s not likely to be a drag on Australian assets versus other countries."

Australia's debt serviceability remains high due to low interest rates, able to borrow on the ten-year bond market at 0.86%, or in the three-year bond market for 0.25%.

However, Mr Oliver did question the ramifications for future generations.

"Further near-term stimulus will be necessary to boost demand. But what about the longer-term consequences? Will the debt ever be paid down? Will fiscal austerity crimp the economy? Or do we live with higher public debt indefinitely?" he said.


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Harrison joined Savings in 2020. He is a journalist with more than four years of experience, with previous stints at News Corp and financial comparison site Canstar. With a keen interest in personal finance, Harrison is passionate about helping consumers make more informed financial decisions.

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