12 May 2021
Close-up on newspaper job section

Federal Budget 2021

Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.

Johnathan McMenamin

EY Oceania Senior Economist

Macro Economist. Keen sportsman. Brewer.

EY Oceania

Multidisciplinary professional services organization

12 May 2021

Old jobs, new tricks?

Inside the budget lockup on Tuesday evening, the pervasive sense was that other than pre-announced policies including large provisions for aged care and childcare, there was little to get excited about. The figures do show the Federal Government’s economic management in the first phase of the pandemic has been strong. A combination of this, as well as resilience from Australians, high demand for our commodities and a sprinkle of luck has delivered us a better than expected budget position. 

What we see in this budget are measures to ensure ongoing pandemic recovery, drive down unemployment, spending that is long overdue around aged care and childcare, invest in skills, extend the instant asset write-off, and a party bag of smaller policies that will presumably create a pre-election sugar hit for a wide base of voters. 

A change in strategy but no comprehensive plan

There’s no getting back into the black with medium term projections showing budget deficits over the forecast horizon to 2031. We shouldn’t be too concerned as this debt is affordable with net interest payments expected to be steady at just 0.7 per cent of GDP, well below historical averages and importantly lower than the expected economic growth rate.

However, that does not mean the outlook is without risk or challenge. As always, there is a range of assumptions underlying the fiscal numbers. The international border is assumed to remain largely closed until mid-2022, which we know will hit economic activity. Not surprisingly, in the face of this, the Government announced some direct spending for those industries directly impacted. It also means that the sectors of the economy that are currently facing skills and labour shortages as a result of the closed border will continue to struggle.

There’s a conservative iron ore outlook but some punchy assumptions around wage growth, consumption and private investment.

There is also $3.8 billion of decisions taken, but yet to be announced in FY22, and a further $1.5 billion over the following three years. It’s not uncommon to account for future unannounced policies, and particularly ahead of an election, but it is a relatively large amount.

What’s missing is a comprehensive plan to address structural weakness already evident in the budget prior to the global COVID-19 pandemic. But we didn’t expect such a plan. Prime Minister Scott Morrison said as much in the past months and cautioned against assuming this budget would contain transformative policies and reform.

And for the most part he was right. This budget does not present Australia, and Australian businesses, with a vision of the future that is inspirational. Even though it’s disappointing that this is not a reform budget, there will be future opportunities for reform - the window is still there.

The stronger than expected economic recovery has paid an economic dividend to the bottom line, but that has largely been spent. Total savings from the economy over the four years is $104 billion, with $96 billion in new measures, some of which are temporary and others structural. The strategy pivot to driving job creation, and the clear willingness for some of this to come via direct spending will see Government play a larger part in the economy, with payments as a per cent of GDP rising from 24.5 per cent in FY18 and FY19 to 27.6 per cent in FY22 and still 26.2 per cent in FY25.

This spending is welcome to support recovery, jobs and transitioning the economy to the future, but it is, as always important to ensure that the outcome of Government policies is efficient and drives a productivity or social dividend.

While housing affordability is a critical social issue, the new housing policy aimed at single parents is one example where we can anticipate the unintended consequences – being some of society’s most financially vulnerable people burdened with a 98 per cent loan-to-value ratio at a time when housing is running hot.

Australia’s housing market hit $8.1 trillion in value last month, surpassing the combined values of listed shares, superannuation, and commercial real estate by $1 trillion. Introducing more policies targeting an economically unproductive asset does little to improve the business dynamism that Australia needs to become future ready and won’t do much for accessibility either.

Business to do some heavy lifting

What was unexpected about this budget, and requires further unpicking, are the Government’s own surprisingly optimistic predictions about non-mining investment. We know that business confidence and conditions have hit record highs, but that doesn’t necessarily translate to higher investment and higher risk taking in business decisions. 

Yet Treasury forecasts assume private businesses will go through significant economic transformation over the next three years, increasing investment to not just bounce back from the pandemic but surpass pre-pandemic levels. 

Indeed, the lift in economic growth over the next few years relies on non-mining business investment, which the government is forecasting will lift by a punchy 1½ per cent in FY22 and 12½ per cent in FY23. While we have seen a bring-forward of some investment in response to the tax incentives, further out a hole likely remains - Consensus Economics long term forecasts show a much lower profile for business investment over the next 10 years compared to a year ago.

A lift in business investment will hinge on whether the host of policies intended to boost investment work. These include the extension of the instant asset write off and carry back loss, and a series of piecemeal policies such as $124.1 million for developing AI capabilities, $18.8 million to develop a digital games sector and $134.6 million for the Governments Deregulation Agenda.

Interestingly, the total spend on the Digital Economy Strategy, which should arguably be a cornerstone of a resilient Australian economic future, is less than $500 million in the next two years and looks to be disjointed – spread across 21 separate government agencies. 

Total spend on the Digital Economy Strategy is less than

$500 million

in the next two years

The introduction of a patent box policy which reduces tax paid on innovation income - targeted at the medical and biotech sectors, which is a welcome – and used in other countries - as Australia has long suffered a poor ability to commercialise innovation, but is not a panacea solution to generating the ‘animal spirits’ that have been lacking for some time. Moreover only suggesting the policy could apply to the clean energy sector in the future is surely a missed opportunity for the Government.

The lack of leadership on climate change remains a concern. Across the 386 pages of the Government’s Budget Strategy and Outlook document, the words ‘climate change’ were used once. In an era where global superpowers are touting a green recovery, and transformation to carbon neutrality is seen as a growth generator, the lack of vision about the potential for Australia is arguably a big miss by the Government.

One risk of this broad range of lower value policies is that it confuses business. The unknown will be whether this subsequently disincentivises business from making big decisions because of nervousness around future uncertainty.   While it is not the Government’s job to guarantee business dynamism, it is within their power to create a vision for the future that encourages an environment fostering innovation and dynamism.

Whether business can make the leap to turbo charged investment without a clear vision of where Australia’s economy is going, is yet to be seen. The pandemic and our closed migration policies have made our population physically older, but it’s also impacted our economy. Without imagining a different future to inspire investment we risk sliding back into an old-fashioned economy, with low levels of diversification, overreliance on a handful of industries and nervousness around taking risk. 

Unlike the US, the top five Australian companies by market capitalisation have remained largely unchanged. Without imagining inspiring investment, we risk sliding back into an old fashioned economy.

Households asked to spend despite weak wages

The household sector is also being asked to do some heavy lifting to help drive economic growth and lead to an improvement in the budget position. The government is optimistically forecasting a lift in household consumption of 5½ per cent in 2021-22 and 4 per cent in 2022-23. Such a boost in consumption will lift employment across the economy and lift government revenues such as GST, which will benefit both the federal government budget balance and the States.

The extension of the Low-and-Middle-Income Tax offset (LIMTO) again will help, as that demographic is likely to spend a good chunk of the $7.8 billion the policy is costed at. However, even with this sugar hit, the outlook for the household sector remains somewhat shaky. Wages growth is expected to pick up slowly over the coming years, but so is inflation, meaning real wages growth won’t see any improvement until 2023-24. This will make it challenging for consumers to spend more when their purchasing power hasn’t increased. This implies a heavy reliance on savings and suggests the government is not expecting much in the way of productivity growth from labour. 


New tax measures announced this year will be welcomed by small and medium businesses. However, what is needed to accelerate long term growth and productivity are tax measures that also incentivise transformative investments by large scale businesses.

The likely introduction of an OECD lead global minimum tax rate brings Australia closer to the field in tax competition for international investment and jobs. This provides an ideal opportunity to leverage Australia’s competitive advantages in skills, research base, political and legal institutions and high standards of living with bolder tax settings that incentivise new investment in high value business activities and create well-paid long-term jobs. 

Jobs for the boys and girls

Australia’s economic rebound has enabled the Government to shift the focus from responding to the crisis to be sustaining the economic recovery. While the last Budget – delivered in October was largely focused on the temporary, targeted and proportionate response to COVID-19, this Budget puts jobs front and centre and aims to drive the unemployment rate below five per cent.

Both fiscal and monetary policy are now driving the economy toward ‘full employment’. Not only is it effective for the two key policy levers to pull in the same direction, but the labour market is important given that it is through jobs that most people experience recessions.

To do this, the Government has used a mix of temporary policies– such as the extension of the low and middle income tax offset which provides a cyclical boost to the economy - alongside permanent ones that embed a structural deterioration in the fiscal outlook, such as childcare and aged care. 

Policies like childcare and aged care provide a social dividend but also boost productivity and participation for those with caring responsibilities.

The ABS tells us that for women that want a job or would like to work more hours, the main reason for not being able to work is caring for children at 48 per cent. So, childcare will go a long way to boosting female participation or involvement in full-time employment.

For a long time, the female labour force participation rate curve has been M-shaped, with women leaving the labour force during childbearing years and re-entering later as their children age. This M-shape has gradually faded over the past few decades and has virtually disappeared for female millennials working in part-time employment. However, when we look at just female full-time employment, this M-shape still exists and females struggle to return to the same level of full-time employment after children, with the effective marginal tax rate for the fourth and fifth day of employment prohibitive.

In addition to job creation and supporting participation, there is some new investment in skills. That should provide a productivity dividend but takes time to feed through to the economy.

Steps in the right direction

Team Australia has shown in the past year how powerful it is when we come together, across political or philosophical divides, industries and sectors, and neighbourhood streets. The economic dividend in this Budget is testament to that.

But the task is far from complete.

This Budget should be applauded, there are some strong and important initiatives here. But it’s not a brave Budget, nor one that shows an inspiring path to the future. And that is what is needed to ensure that we can to offer economic opportunity for all.


Inside the budget lockup on Tuesday evening, the pervasive sense was that other than pre-announced policies including large provisions for aged care and childcare, there was little to get excited about.  

About this article

Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.

Johnathan McMenamin

EY Oceania Senior Economist

Macro Economist. Keen sportsman. Brewer.

EY Oceania

Multidisciplinary professional services organization