Australia’s New Budget Envisages Massive Deficits for a Decade

Budget introduces major new spending on aged care . . .

When the Australian Liberal-led coalition government tabled its 2021-22 budget earlier this week, it included major investments to boost the economy’s growth following the country’s COVID-related downturn in 2020. An estimated additional C$16.9 billion over five years will go towards elder care, following recommendations by the Royal Commission on Aged Care Quality and Safetypublished in March, to address major flaws in the sector, including those that exacerbated the impact of COVID-19 on elderly Australians. The Royal Commission found an estimated one in three people living in Australian aged care residences experience neglect or physical or emotional abuse.

Strong economic rebound but deficits locked in . . .

Before the pandemic, the Liberal-led coalition pledged to run surpluses of 1 per cent of GDP and to save windfall revenues (such as revenues from current record-high iron ore prices) for future generations. But the game has changed. The new budget predicts 10 years of deficits, with each expected to be in the order of about C$95 billion. Australia’s treasurer said the new spending was required given the exceptional nature of Australia’s current economic circumstances, even though its economic recovery from the worst of the COVID slump has been strong. Critics observed that the conservative Liberal Party has served up a Labor Party budget, and the projected recurring deficits look to be structural.

What does this mean for Canadian investors?

APF Canada’s Investment Monitor 2021 identified Sydney, Melbourne, and Perth as three of the top four city areas in the Asia Pacific for Canadian foreign direct investment from 2003 to 2020. Will recurring deficits depress economic growth and deter Canadian (and other) investors? Possibly, but it depends on whether and how additional spending catalyzes productivity. For example, increased investments in elder care may facilitate increased workforce participation, as people are able to work in paid employment instead of caring for elderly relatives. While the size of such an effect remains to be seen, increased spending on elder care does bring welcome additional predictability to the sector.