What to Watch in Australia's Budget Bonanza for 2020-21

(Bloomberg) --

Australia's government will use Tuesday's budget as a spending springboard to restart the economy, with Treasurer Josh Frydenberg ditching fiscal restraint to pull the nation out of recession.

Frydenberg's plan to resuscitate growth is set to see the budget deficit gape to A$220 billion ($158 billion), or 11.6% of gross domestic product, this fiscal year, according to the median estimate from a Bloomberg survey of economists. That's a A$35.5 billion blowout from Treasury's July forecast.

The following are five key issues to look out for when Frydenberg hands down the budget at 7:30 p.m. in Canberra on Oct. 6.

Back to Work

Unemployment is set to rise to 8% by June 2021, from the current 6.8%, according to the median estimate from Bloomberg's survey of economists. Treasury's July update predicted unemployment would peak at 9.25% this quarter, while the Reserve Bank of Australia sees a peak closer to 10%.

Frydenberg is set to keep stimulus flowing until joblessness heads back toward full employment -- considered to be around 5% -- setting up a spending spree before an election due mid-2022. Economists predict unemployment will still be about 7% at around that date.

Taxing Times

Australia's government is expected to bring forward legislated income-tax cuts scheduled for July 2022, amending brackets so a greater share of someone's wages are taxed at lower rates.

It is debatable whether tax cuts are the best use of resources to generate additional demand and employment. However, they have been on the table for several years, with the government keen to address so-called bracket creep, where rising incomes push people into higher tax bands.

Bringing forward tax cuts will spur households to part with some of their recently built up savings from the earlier government stimulus, according to the Commonwealth Bank of Australia. With the savings ratio at a 46-year high, tax cuts just might be enough to encourage households to deploy that cash, which would be a boon for consumption that accounts for about 55% of GDP.

Build It and They Will Come

Money will be directed to infrastructure investment to generate jobs, and if chosen well, to boost long-term productivity. RBA Governor Philip Lowe has long held the view that the government should take advantage of the low interest rate environment to invest in the economy's future.

Large projects tend to have long lead times, meaning the boost often comes when the economy is well into the recovery. To get the economy moving quickly, smaller, “shovel-ready” projects, such as building housing for low-income Australians has been mooted. But the risk is that in the rush to get programs going quickly, the bigger picture can be overlooked and projects become political footballs.

Boom or Bust

Rallying prices of Australia's largest export iron ore -- as China deployed stimulus to re-energize its economy from a Covid lockdown -- has been a boon for the local budget. The commodity has traded well above $100 since July, creating additional company tax collections from miners as Treasury's assumptions were based on iron ore falling back toward $55 a ton by year's end.

Yet this is a double-edged sword. The strength of commodity prices, as well as Australia's relative success in containing the virus, has seen the currency soar almost 25% from a March low. The RBA has said a lower currency would be beneficial for the economy.

The government is likely to keep low-balling the iron-ore forecast, baking in upside for the budget.

Open for Business

Critical for the economy's recovery is the outlook for reopening the international border. Australia's fourth- and fifth-largest exports -- education and tourism -- are effectively shuttered and are likely to stay that way until a vaccine is available.

Closed borders have slashed immigration, a key driver of activity in housing construction and broader consumption. New arrivals are set to plummet this year and population growth to slow to the lowest rate in more than a hundred years.

The economy will remain below its potential until these service sectors can resume operations. The government will need to look toward retraining workers and redirecting capital if border closures persist beyond 2021.

©2020 Bloomberg L.P.