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Federal Budget 2021-22: Overview

Federal Budget 2021-22: Overview

The Federal Budget 2021-22 was built against the backdrop of an ongoing global pandemic and the faster than expected economic recovery to date. The resilience and resurgence of much of Australia’s economy has been supported by a range
of temporary Government initiatives designed to help businesses and individuals navigate the unprecedented upheaval in the Australian and global economies.

Key take-aways
  • Treasurer Josh Frydenberg announced an expected deficit of $161 billion, $36.7 billion lower than the $197.7 billion estimated in the Government’s December Mid-Year Economic and Fiscal Outlook (MYEFO).
  • Net debt will increase to $617 billion this year and peak at $980.6 billion in June 2025.
  • Australia’s GDP growth is expected to come in at 1.25 per cent this financial year.

The short-term support announced in the previous budget has done its job in some ways. Consumer sentiment reached an 11-year high in data released the week following the unwinding of JobKeeper. Similarly, business confidence reached a record high as trading, profitability and employment increased over the first quarter of 2021.

Driven by faster than expected jobs growth, strong consumer sentiment and record high iron ore prices, Treasurer Josh Frydenberg announced an expected deficit of $161 billion, $36.7 billion lower than the $197.7 billion estimated in the Government’s December Mid-Year Economic and Fiscal Outlook (MYEFO). Net debt will increase to $617 billion this year and peak at $980.6 billion in June 2025.

It’s a better than expected result compared to the economic abyss the country might have faced in 2020, but there’s still work to be done if Australia truly wants to compete on the global stage and create an environment that encourages long-term business investment and economic growth. Australia’s GDP growth is expected
to come in at 1.25 per cent this financial year.

While some sectors such as recreation and personal service businesses have returned to operating at pre-COVID financial levels, other sectors impacted by the continued border closure face ongoing headwinds. Australia’s borders aren’t expected to re-open until at least mid-2022, which means immigration and international tourism are still off the table, as are most international student arrivals. Immigration and international students are important, not only for the industries and businesses they support through their spending, but are critical for labour supply in many industries if we are to make the most of the expected economic bounce the Budget seeks to support. Much of the spending in this Federal Budget is focused on short-term measures for continued economic recovery to get the unemployment rate below 5 per cent. A strategic long-term and multi-decade approach to genuine reform and economic growth, however, remains to be seen.

While it’s fair to say there are some concessions aimed at the middle market, there is not as much support to employ, innovate or export from what we have seen to date, nor genuine long-term structural initiatives announced. This short-term debt-fuelled spending inevitably adds to the deficit that the Australian middle market and future generations will be asked to pay down.

In short, we would like to have seen more substantial and structural measures that look to the decades ahead. Australia prides itself as being a developed economy, but looking at the industries represented by many of the largest businesses in our economy, we are heavily weighted to traditional industries of finance and materials, much more so than our peers in the USA and Europe, where technology, communications services and biotechnology represent much larger parts of the business community than they do here in Australia.

The Government could have looked to:

  • lift education outcomes with a view to developing genuinely innovative minds that will help to evolve our economy to build the businesses and jobs of the 21st
  • enact the long-term tax reform necessary to encourage research and development, innovation
    and technology that rewards outcomes to assist in attracting and retaining the world’s best minds. The patent box is a great start and we would encourage the expansion of this initiative.
  • create an economy and culture that supports and encourages new value creating industries by rewarding effort, encouraging participation and celebrating success to encourage our best and brightest to remain in Australia.
  • foster import replacement industries by encouraging local content and production through accommodative taxation and regulatory frameworks.

With this Budget, the focus has remained on continuing to support the near-term economic recovery through big ticket spending on infrastructure and targeted support for industries that will continue to suffer while our borders remain closed. Some of the key measures for business and stakeholders from this year’s Budget:

  • 12-month extension of the temporary full expensing measures (instant asset write off) introduced
    in the 2020-21 budget to allow a deduction for the full cost of eligible depreciating assets first used
    or installed ready for use entities with aggregated turnover of less than $5 billion.
  • 12-month extension of the loss carry-back offset introduced in the 2020-21 Budget, allowing corporate entities to carry back tax losses for the 2022-23 income year for up to four income years.
  • $15 billion in additional infrastructure commitments, including for a new intermodal terminal in Melbourne and a new airport in NSW.
  • A range of welfare spending initiatives, including $13.2 billion and $17.7 billion allocated to the National Disability Insurance Scheme and new aged care funding, respectively.
  • Consumption stimulus through the extension of the low and middle-income tax offset (LITMO)
    for a further year
  • A $1.7 billion investment in childcare to drive workforce participation and women’s economic security

We look to the future with cautious optimism. Continued strong Government support should help to entrench the nascent recovery much of our economy is enjoying. For now, the middle market must focus on harnessing the considerable opportunities the recovery presents and work to re-establish and then future proof themselves.

A final cautionary observation – the Budget forecasts are all predicated on a complex set of assumptions.  Invariably, these will be concerned with fundamentals such as growth, core commodity prices and general trading conditions. As we have seen with both the strong rebound in employment and the vaccine rollout, expectations of timelines are changing rapidly, and these will continue to have large impacts on short term budgets and economic conditions. Staying flexible, efficient, and productive will be as important as ever for the middle market in the year ahead.

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This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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