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Date : 23/10/2020

Budget Expansion – Volume I

Consumer Spending at the forefront

The Australian government had planned to return the budget to a surplus by clearing off its debt early next decade. However, with the economy at its worst point in over a century, it was in desperate need of a stimulus even it meant abandoning a long-aspired plan. The current spending puts the budget deficit for FY2020 at over $200 billion – which is approximately 11% of the GDP of Australia. The total debt the government would have amassed looks set to reach $1.1 trillion in 2023-24.

Reducing unemployment in the country looks to be a priority for the government – and rightly so. Managing unemployment is the first step towards a healthy economy. The months of April and May resulted in close a million job losses in the country. The government estimates unemployment to peak around at 8% this year and gradually fall to pre-covid19 levels over the course of the next few years. The current unemployment rate sits at 6.9% – a slight increase from August’s 6.8% due to the loss of close to 30,000 jobs as Covid19 restrictions in Victoria hit the economy pretty hard.

Australia’s JobKeeper program has been hailed by almost everybody. The government has stepped up and supported the ones that need assistance. Close to 900,000 SMB’s and 3.5 million individuals have been supported through the program. The payments so far have reached $60 billion. The total cost of the program is estimated to reach $101 billion over the course of 2020-21.

Tax cuts were also announced in a bid to hopefully boost consumer spending. The notion here is that if people can save more of the money they earn, they may spend more. However, there is always the risk of individuals saving more for a rainy day. The savings ratio which was at 6% according to the Australian Bureau of Statistics has now jumped to 19.8% in the June quarter. Either way, tax reliefs are estimated to boost the GDP by $6 billion in 2020-21 and $19 billion the following year with 11 million individuals are set to receive tax reductions.

It is clear that the government is trying to increase consumer spending with these policies. A number of businesses would benefit from the rise in demand and increased consumer spending. Hence, stocks and certain sectors would benefit from the budget. We will go into detail on equities in our next volume.

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