Federal Budget 2021-22: The Australian Comeback

About the author:

Michael Knox
Author name:
By Michael Knox
Job title:
Chief Economist and Director of Strategy
Date posted:
11 May 2021, 10:00 PM

Michael Knox updates on the Australian Federal Budget 2021-22 released. Better budget deficits than anticipated support bigger social programs in the years ahead.

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Given the drama that the world and Australia has lived through in the past 15 months, the economic outlook shown as Table 1.2 in Budget Paper No.1, appears at first to be as dull as a rainy weekend. This may be because through the year GDP numbers, iron out the dramatic short-term variation that we have lived through.

Figure 1: Major economic parameters

Federal Budget 2021-22: Major Economic Parameters


The Australian Treasury thinks that after a fall in GDP of 0.2% in 2019-2020, GDP will grow by 1.25% in 2021. Then the action begins. GDP should grow by 4.25% in 2021-2022. In 2022-2023, it declines to 2.5%. It then declines to 2.25% in 2023-2024, before lifting again to 2.5% in 2024-2025.
Employment growth gives us a greater sense of the action that occurred. Employment fell by 4.2% in 2019-2020. It should rise by 6.5% in 2020-2021. From then on, employment growth is somber. Jobs should grow by 1% in 2021-2022, and 1% again in 2022-2023. There is a slight acceleration to 1.25% growth in jobs in 2023-2024 and 2024-2025.

Unemployment grows to 6.9% in 2019-2020. It will have declined in 2020-2021 to 5.5%. Unemployment is expected to decline again to 5% in 2021-2022 and 4.75% in 2022-2023. It should then decline to 4.5% in 2023-2024 and 4.5% again in 2024-2025. This level of unemployment of 4.5% is low enough to generate increases in real wages. We know this because a Treasury study suggested that real wage increases would occur with an unemployment below 4.75%. We think that the estimates of wages only increases in line with inflation in 2023-2024 and 2024-2025 are too pessimistic.

The variation in inflation may be dramatic in the short term. The CPI is expected to rise by 3.5% in 2020-2021. This is higher than the increase in wages of 1.25%. This suggests a short-term decline in real wages. This of course is straight out of Maynard Keynes general theory as one of the best ways of making sure unemployment falls, and that is exactly what is happening.

The CPI slows in 2021-2022 to 1.75% and wages growth rises to 1.5%. In 2023 both inflation and wages increase at the same rate as 2.25%. The Budget papers expect that both will increase together in 2023-2024 at 2.5%. As we have said above, we think that the increase in wages growth at that point will be higher, given that unemployment is only 4.5%. We expect wage growth to be higher than the 2.75% estimate shown in 2024-2025 for the same reason that unemployment is only 4.5%.

Figure 2: Budget aggregates

Federal Budget 2021-22: Budget Aggregates 

Budget Paper No 1 Table 3.1 shows us the expected variation of the Budget deficit. Australia will wind up with one of the mildest swings in its fiscal balance in the OECD. An underlying cash balance of $85.3 billion or 4.3% in GDP in 2019-2020 is expected to be followed by a deficit of $161 billion or 7.8% of GDP in 2020-2021. This is mild in comparison to the US Budget deficit of 14.7% of GDP in calendar 2020 and 13.9% of GDP in calendar 2021.

Our underlying cash balance is expected to decline to a deficit of $106.6 billion in 2021-2022, a deficit of 5% of GPD. Deficits are expected to decline over the following years to 4.6% of GDP in 2022-2023 followed by 3.5% of GDP in 2023-2024 and 2.4% of GDP in 2024-2025.

Figure 3: Underlying cash balance as a share of GDP

Federal Budget 2021-22: Underlying Cash Balance 

Chart 3.4 above of Statement 3: Budget Paper No 1, shows us how much better the budget outlook is in these budget papers compared to the budget papers we saw last October. What seems to have happened, is that the underlying cash balance in 2021 is much better than was anticipated because of “stronger tax receipts on the back of a stronger economic outlook”.

This stronger economic outlook is unanticipated in 2020-2021 but is now incorporated in the forward estimates in following years. Still, iron ore spot prices are assumed to decline to US$55/tonne by the end of the March quarter 2022; metallurgical coal spot price assumed to remain at US$112/tonne and thermal coal spot price assumed to remain at US$93/tonne. This allows room for the actual result in those years to be better than the forward estimates.

Where the money goes

In Figure 4 below, we see that the total outlays for the Australian budget for 2021-2022 have now risen to $598 billion. The largest sector of this is Social Security and Welfare, with expenditure of just under $210 billion. This is 35.6% of the total budget. As we might expect in an international natural disaster, the next biggest expenditure is on Healthcare. This sees spending of $98.3 billion or 16.7% of the total. Education sees expenditure of $42.8 billion or 7.3% of the total. In spite of the fact that we live in troubled times, Defence is only $34.5 billion or 5.8% of total spending.

Figure 4: Estimates of Australian General Government expenses by function

 Function  2021-22 AUD $m   % of Total Expenses 
 Social security and welfare  209,975   35.6% 
 Other purposes  111,106   18.9% 
 Health   98,283   16.7% 
 Education  42,799   7.3% 
 Defence  34,473   5.8% 
 General public services  26,070   4.4% 
 Other economic affairs  14,640   2.5% 
 Transport and communication  14,460   2.5% 
 Fuel and energy  9,638   1.6% 
 Housing and community amenities  7,869   1.3% 
 Public order and safety  6,652   1.1% 
 Recreation and culture  4,532   0.8% 
 Agriculture, forestry and fishing  4,483   0.8% 
 Mining, manufacturing and construction  4,354   0.7% 
 Total Expenses  589,334   100% 

SOURCES: Budget Paper No.1: Budget Strategy and Outlook 2021-22 Statement 6, Expenses and Net Capital Investment; Morgans

In Figure 5 below, we see the absolute increases in spending in each sector. The largest absolute increase in unsurprisingly in the Health sector, where spending rises by $4.5 billion. Transport and Communication is next, with an increase in spending of $1.4 billion. Education follows with an increase in spending of $1.06 billion. Mining, manufacturing and construction sees an increase in spending of $1.05 billion. Perhaps surprisingly as we live in troubled times, Defence hardly increases at all. The total increase in Defence spending is only $58 million. This is an increase of only 0.2%. Perhaps we are not as scared as other people make us out.

Figure 5: Estimates of increases in Australian General Government expenses by function

Function 2020-21 $m 2021-22 $m Dollar Inc. $m % Change
Other purposes 96,449 111,106 14,657 15.2%
Health 93,771 98,283 4,512 4.8%
Transport and communication 13,060 14,460 1,400 10.7%
Education 41,742 42,799 1,057 2.5%
Mining, manufacturing and construction 3,306 4,354 1.048 31.7%
Fuel and energy 8,771 9,638 867 9.9%
Housing and community amenities 7,086 7,869 783 11.0%
Agriculture, forestry and fishing 3,913 4,483 570 14.6%

Recreation and culture

6,212 6,652 440 7.1%
Defence 34,415 34,473 58 0.2%
General public services 31,764 26,070 -5,69 -17.9%
Social security and welfare 227,529 209,975 -17,554 -7.7%
Other economic affairs 97,948 14,640 -83,308 -85.1%
Total Expenses 670,330 589,334 -80,996 -12.1%

SOURCES: Budget Paper No.1: Budget Strategy and Outlook 2021-22 Statement 6, Expenses and Net Capital Investment; Morgans

What this Budget does

The first thing we can see is that the Australian turnaround has been achieved with much smaller budget deficits than is the case in other major OECD economies. Yet, in spite of relatively small deficits, we have a strong recovery in which those budget deficits move to even smaller levels.

This budget provides continuing support for long-term growth.


The Australian comeback is now in progress. Better budget deficits than anticipated, support bigger social programs in the years ahead.

Still, some very conservative estimates on future iron ore prices allow the government the chance of further happy surprises over coming years.

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