Momentum is the new sustainability

In our budget article for 2020, we wrote about sustainability and the importance the Australian federal budget would play in providing our economy with the support it required to endure one of the most challenging global crises most of us have ever experienced. For the 2021 budget, we expect the focus will shift from ‘sustaining the economy’ to ‘maintaining momentum’.

Our economic position

Australia has fared quite well over the past twelve months. Being an island (or several islands), we have managed to keep ourselves relatively safe from the spread of COVID-19. This was primarily done by shutting our borders. This had an obvious economic impact, which the government rightly sought to protect with JobKeeper.

We have seen very positive outcomes from this stimulus. The International Monetary Fund recently upgraded Australia’s forecast growth for 2021 to 4.5 per cent (up from its previous forecast of 3 per cent). Australian GDP is likely to show that it has essentially recovered to its pre-COVID-19 GDP levels, with steady growth in the first quarter. A brief review of recent property sales will show record results in many cities in our country. But are we atop a slippery cliff?

JobKeeper ended a month or so ago. This was essential source of financial lifeblood for many sectors of our economy. Many businesses will be trying to figure out if their business can continue without this. According to recent forecasts by Treasury officials, the removal of JobKeeper could see approximately 100,000 to 150,000 people added to our unemployment numbers. Clearly no government would want to see this.

Most economists predict the Australian economy will continue its recovery, particularly as international borders re-open. As this occurs, there is an expectation that this momentum from the anticipated economic rebound will offset a potential, but increasingly unlikely, JobKeeper slump.

Expectations of this year’s budget

The Federal Government will be relishing a stronger labour market and significant improvements in its forecast deficits for 2020/21 and 2021/22. As a result, this will likely give the Government the ammunition to spend more on key economic areas in its May 2021 budget to provide further momentum to the economy.

There are several tensions in this budget which make it difficult to predict which approach the Government will take:

  • Firstly, there is a need to repair the budget due to COVID-19 spending both at state and federal levels,
  • Secondly, there is a need to continue to support affected industries (such as tourism and hospitality) as they take longer to recover, and
  • Finally, there is an election looming (7 August 2021 at the earliest). The Government may use this budget as a pre-election sweetener.

We expect to see incentives offered through the budget in the aged and childcare sectors, energy (particularly green energy), education and, of course, personal tax.

The Tax Institute, in their 2021 pre-budget submission, considers that comprehensive tax reform across several areas, including FBT, GST, company and personal tax rates, should be the priority. It also includes other recommendations such as:

  • Targeted superannuation concessions for women, downsizers and people who withdrew funds to support COVID-19 cash shortfalls,
  • Permanent retention of asset write-offs (subject to cost thresholds), and
  • Incentives to attract capital to Australia to invest in locally developed IP.

Employment incentives may remain be on the agenda. However, with the unemployment rate trending down, further employment incentives may be limited (that is, unless the April 2021 numbers show a spike post-JobKeeper). We think most interest will be in betting on which version of the “Job<insert here>” tag the government will use!

There are also many other critical outstanding tax issues such as reform of private company loan rules, capital gains tax rollovers and personal service income taxation which have an impact on private businesses. We will wait to see whether the Government provides any further guidance on these issues as part of this budget.

The good news for Australia is that our post-COVID recovery has been swifter than many countries, which makes Australia a favourable place for foreign investment. The Government is well placed to capitalise on this position and use this budget to provide further stimulus to attract foreign capital, to support Australian business and innovation, and to ‘maintain the momentum’.

If, at any time, you have any questions as to how this budget impacts you and your business, please contact your local Bentleys advisor. We can help you get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

Register for Bentleys' post budget webinar - 13 May 2021

Register for Bentleys' 2021 Federal Budget analysis and insights

  • This field is for validation purposes and should be left unchanged.