3 economic facts point to a big federal budget

“It’s hard to make predictions,” the saying goes, “especially on the future. “The many forecasts that federal budgets make for the economy over the next four years must therefore be taken with a big grain of salt.

But as the 2021 budget approaches (which will be announced by Treasurer Josh Frydenberg on May 11), three notable economic facts, on which no speculation is required, weigh heavily.

Inflation at its lowest

Fact # 1 is the inflation figure for the first quarter of 2021, released by the Australian Bureau of Statistics this week.

Using the commonly accepted measure known as the “truncated mean” – which eliminates short-term fluctuations in trimming the most important up and down movements – core inflation has only increased by 1.1% over the past year.



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This, as an office Remarks, is “the weakest annual movement on record” for the March quarter.

What this highlights is the absence of significant inflationary pressures in the economy. It validates the Reserve Bank’s view that aggressive monetary and fiscal stimulus are needed to revitalize the economy. The central bank can keep interest rates at historically low levels without triggering a dangerous rise in inflation.

Manageable debt levels

Fact 2 concerns the sustainability of public debt levels, which have increased due to Australia’s fiscal response to the pandemic.

The Parliamentary Budget Officer published a report on Wednesday noting:

Gross debt has increased from 28% of GDP before the pandemic to over 40% of GDP in 2020-2021, and is expected to reach over 50% of GDP in 2022-2023. The government predicts that the debt will remain above 50% of GDP for at least the next decade.

There is no shortage of deficit hawks who find these debt levels alarming, despite being among the lowest among advanced economies.

But as the PBO points out, historically low interest rate levels mean the government is able to borrow cheaply, making these debt levels comfortably sustainable:

Our scenarios for GDP growth, interest rates and fiscal balance suggest that the government will be able to maintain a sustainable level of debt relative to GDP over the coming decades. We present 27 different scenarios, showing that the public debt stabilizes or decreases beyond the next decade. Interest payments on debt also remain manageable.

This means the government can avoid damaging spending cuts in this budget and beyond. Rather than introducing austerity measures when unemployment is “comfortably below 6%”, according to treasurer John Frydenberg previously reported, it can continue to invest heavily in social and physical infrastructure to increase productivity and help reduce unemployment to 4%.

Frydenberg clearly nodded at this yesterday when he said:

These are unusual and uncertain times. For these reasons, we are resolutely staying in the first phase of our economic and fiscal strategy.

This is important for at least three reasons.

First, the RBA pushed monetary policy to its limits with record interest rates. Thus, fiscal policy – the way the government taxes and spends – is the only lever available to stimulate the economy and reduce unemployment.

Second, the possibility of reducing unemployment to levels not seen for an extended period in decades would make a huge difference in the lives of over 100,000 Australians who would otherwise be unemployed.

Third, the RBA and the Treasury have stressed that unemployment must fall below 5%, perhaps less, to revive wage growth.



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Booming iron ore revenues

Fact 3 concerns our iron ore exports.

Australia exported a record A $ 14 billion worth of iron ore in March, according to ABS data. This represented 39% of the country’s total exports for the month.

This value was due to higher volumes sold as well as a rise in the price of iron ore – now over US $ 190 per tonne. It’s a level no seen in a decade. Analysts predict it will soon exceed US $ 200.


Iron ore price chart by month, in US dollars, January 2001 to January 2021.

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This results in a sharp increase in government tax revenue, giving Frydenberg more leeway to spend a lot while keeping the deficit at manageable levels.

An electoral budget

The May 11 budget will likely be the last before the next federal election. It’s worth noting. Only a reckless treasurer would cut spending just before going to the polls.

But as I and most other mainstream economists have said for some time – seeing a distillation here – the continuation of budgetary support is vital to relaunch economic growth, reduce unemployment and return to real wages.

So the treasurer not only has the electoral incentives to do the right economic thing, but the economic data to support that movement.



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