Federal Budget 2021: Genuine tax reform stuck in the too-hard basket: Bill Evans

The policy approach was appropriate highlighted by worthy social programs, however, a better balance between short term tax initiatives and genuine tax reform would have been a more effective approach

Federal Budget 2021: Genuine tax reform stuck in the too-hard basket: Bill Evans
Federal Budget 2021: Genuine tax reform stuck in the too-hard basket: Bill Evans

EXPERT INSIGHT

Make no mistake, this is a big spending budget.

The policy approach was appropriate highlighted by worthy social programs. However, a better balance between short term tax initiatives and genuine tax reform would have been a more effective approach.

New stimulus initiatives, headlined by the surprise extension to the instant asset write-offs for businesses, are worth 4.1 per cent of GDP over four years – about eight times the pace of the pre-election budget in 2019.

For perspective, the government’s stimulus spending in last year’s budget following the biggest economic shock since the 1930s was a little higher at 5.5 per cent of GDP, but not materially so.

The disruption from COVID and this associated stimulus response is forecast to see net debt lift from 19.2% of GDP in 2018/19 to 34.2% in 2021/22 and 40.9% in 2024/25.

Despite this sharp increase in debt the cost of servicing the debt is forecast to hold at a modest 0.7% of GDP due to the low interest rate environment.

An early use of policies to reduce debt would have been at the expense of allowing the economy to operate at its potential.

As with other countries debt ratios are unlikely to return to pre COVID levels.

Any return to sustained full employment would see significant budget repair although the public sector is still likely to cycle around much higher debt ratios than we saw before the advent of COVID.

Despite employment levels now being above pre-COVID-19 levels and GDP expected to boom this year, the government is clearly going all in to “secure the recovery” and drive the unemployment rate down faster.

This drive for growth strategy, along with appropriate commitments to additional services, sees fiscal and monetary policy firmly working together to reach full employment.

The government defines full employment as 4.5 per cent, although that level is not forecast to be reached until mid-2024. Westpac – and I believe the Reserve Bank – sees it as 4 per cent or even a little lower.

BILL EVANS is the Chief Economist at Westpac

Tags: 
2021 Federal Budget 2021 Forecast Tax Reform

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