Steady as we go: restrained outlook means restrained spending
This week’s Federal Budget is the fourth annual Budget in just two years, but the first for the Albanese Government. The economic context is tricky for fiscal policy, with a deteriorating global and local outlook compounding concerns about living costs, housing, social services and skills.
The Government clearly acknowledges the need to address widespread pressures on the cost of living and cost of housing, versus measures that aim to dampen excess demand and inflation. In addressing inflation, fiscal policy (revenue and spending) needs to work in concert with monetary policy (interest rates and related settings). This budget appears to be conscientiously doing that.
Four key themes in this Federal Budget touch on future housing markets and housing policy, but none include measures that will be implemented immediately or have a short-term impact on housing. We dive into the greatest detail on the first of the four themes below:
1. A new ‘housing accord’ to address national housing availability, but can we build it?
2. Labour and skills shortages in the construction industry and across the economy
3. Inflation and ‘cost of living’ pressures will ease eventually, but not immediately
4. Strengthen Government’s economic policy focus on ‘wellbeing’ and fiscal sustainability
High inflation and higher interest rates will put the brakes on activity and jobs growth from 2023
Global geopolitical factors are contributing to energy and food pricing pressures worldwide, including the war in Ukraine and its direct impact on gas, oil, wheat and other commodity staples. In the United States, United Kingdom and Europe, inflation is already causing a significant deceleration in economic activity, and may even lead into recession. In China and elsewhere in Asia, industrial production, supply chains and passenger travel are still being disrupted by lingering COVID-19 impacts, plus inflation.
The budget documents confirm that Treasury expects Australia’s economy to grow by a reasonably strong rate of 3.25% per annum (p.a.) in 2022–23, but then slow to just to 1.5% in 2023–24 due to the weaker global outlook, high inflation and higher interest rates. This is weaker than Treasury had expected in April, when it released its pre-election outlook. Labour demand is expected to soften in response in 2023–24 and the unemployment rate is forecast to rise to 4½% by the June quarter of 2024, which is still well below pre-pandemic levels. Workforce participation is likely to ease from recent peaks, as labour demand softens and jobseekers drop out of the labour market.
The current inflation surge is expected to peak this year at 7.75% p.a. due to global energy costs and the impact of flooded farmland, with headline inflation dropping back to 3.5% p.a. by June 2024 and 2.5% from 2024-25. Local inflation spikes are likely to continue well into 2023, due to the impact of local flooding on food production. The broad-based nature of inflation is making it difficult for households to avoid price increases by switching and substituting between items. Energy inflation expectations are startling, with a further 56% increase in retail electricity prices expected over the next 18 months. No subsidies or rebates are offered to counter this rise. The combination of sustained inflation plus very modest wage growth implies further cuts to real incomes for many wage-earning households, at least until inflation subsides after 2024.
In the housing market, dwelling investment (spending on new housing and renovations) grew by a relatively strong 2.8% in real terms in 2021-22 (inflation-adjusted) but is expected to decline by 2% in 2022-23 and a further 1% in 2023-24, in response to post-boom conditions and higher rates.
Sustained inflation plus very modest wage growth implies further cuts to real incomes for many wage-earning households, at least until inflation subsides after 2024.
In the housing market, dwelling investment (spending on new housing and renovations) grew by a relatively strong 2.8% in real terms in 2021-22 (inflation-adjusted) but is expected to decline by 2% in 2022-23 and a further 1% in 2023-24, in response to post-boom conditions and higher rates.
Theme 1: A new ‘housing accord’ to address national housing availability, but can we build it?
One of the biggest headlines in this budget is a target of “one million new affordable homes” to be built over five years from 2024, through an agreement with state and federal governments, institutional investors and industry. However, this target is an “aspirational” one only; it is not fully funded by national or state Governments and is dependent on encouraging private investment.
A range of measures and programs are listed in the budget as contributing toward this target, but in aggregate they will provide only a fraction of the headline ‘one million homes’. Direct Government funding commitments are very small, at just $350m over five years, and will contribute to just 10,000 new affordable homes ($35,000 per home) from 2024. States and territories will support an additional 10,000 affordable homes, increasing the dwellings that can be delivered by the public sector under the Accord to 20,000.
Instead, the single largest source of Government support for the Housing Accord target will be provided through a new Housing Australia Future Fund which will receive $10bn in order to provide sustainable funding for housing supply and service delivery (e.g. through revolving credit), and will seek to draw in investments from state and territory governments and private capital providers. This new Fund will aim to provide 30,000 social housing and ‘affordable’ dwellings, 4,000 of which will be reserved for women and children affected by domestic violence and older women who are at risk of homelessness. A further 5,500 social housing dwellings will be funded from the existing National Housing Infrastructure Facility, which holds $575m in previously unallocated funding. Other sources of government support for affordable housing will be provided through a combination of first home buyer guarantees, grants for Defence veterans and the existing shared equity scheme.
Going forward, Government intends to refine its approach to affordable housing, and will flesh out how it will meet its aspirational target through a new National Housing and Homelessness Plan. This will be supported by a National Housing Supply and Affordability Council, which will independently advise the Government on housing policy, report on key issues in housing policy, and promote the regular collection and publication of data on housing supply, demand and affordability.
The Budget makes clear that ‘one million new affordable homes’ is an aspirational target and not a funding commitment. It also clarifies that this target will include the collective efforts of all state and territory governments. This includes, for example, recent announcements by Queensland and Victoria about new affordable housing schemes in partnership with investors and developers.
Crucially, this national target aims to increase the supply (or fixed stock) of homes available nationally, and not simply to generate turnover, activity and jobs across the construction industry. This means it must be carefully designed to ensure that the new homes are a net addition to existing housing stocks and do not displace homes that would have been built by the private sector anyway.
The Budget sets the timing of the target at five years from 2024 and notes that construction industry ‘capacity constraints are expected to ease’ from that time. Even if capacity constraints ease however, how realistic is this target of adding one million new affordable homes in only five years?
Recent history provides a good guide to our national home building capacity. Based on ABS estimates of the total stock of dwellings across Australia, it has taken a minimum of around five years to add one million homes to our national housing stock over the past decade, and sometimes longer. Most recently, the number of dwellings added to our national stock of housing grew by just 1.5% p.a. (around 160,000 net additional dwellings) in 2021-22, despite record levels of residential construction and renovation over that year. This was down from a peak of 2.2% p.a. (210,000 net additional dwellings) during the apartment-building boom in 2015 and 2016.
Projecting an average growth rate of 1.8% (the average for the past decade), Australia is currently on track to add 1 million homes to our current national dwelling stock of 10.8 million homes by 2027 and 2 million homes by 2032, without any additional Government support or measures.
If we wish to add a further one million homes in addition to the homes that could already be reasonably expected to be added over the next five years, then Australia’s annual growth rate in dwelling stocks would need to roughly double and remain at that higher level for around five years. Even if the target of one million net new homes were extended over ten years, this target would still require significantly faster dwelling construction than in the past.
With building backlogs and labour shortages already being reported nationwide, it is not clear that the construction industry has the capacity to undertake this amount of building in this time frame. Natural disasters and COVID-19 disruptions and delays between 2020 to 2022 mean that the backlog of repair and replacement work is significant and is still growing, with more homes damaged by extensive repeated floods across Victoria and NSW in recent weeks. These very real delays and capacity constraints in construction place a big caveat on any plans to add new homes quickly and cheaply, regardless of whether the work is funded by the public or private sectors.
Theme 2: Labour and skills shortages in the construction industry and across the economy
A critical issue for the Government if it is to achieve its ambitious national housing plans will be ensuring the sector is able to access an adequate supply of skilled labour. Skills shortages and outright labour shortages have plagued the Australian economy since the pandemic, not least in Australia’s huge construction industry, which accounts for around 10% of GDP and a similar proportion of employment. Residential construction is running at capacity nationally, with a large pipeline of work waiting to commence, impacted by delays in the supply of materials and longer construction times due to weather, COVID and other disruptions.
Skill shortages in construction have been problematic over an extended period due to problems with commencement and completion rates in apprenticeships, which are the main form of entry-level training in residential construction. Apprenticeship numbers improved in 2021 and 2022 but are probably still lower than the industry needs over the long-term. No new funding is provided for apprenticeships and traineeships in this Budget. Instead, the Government is developing an ‘Australian Skills Guarantee’ that will require one in ten workers on major federally funded construction projects to be an apprentice, trainee or paid cadet, with specific targets for women.
For other types of entry-level training, this Budget provides funding for 480,000 fee-free TAFE places over the next four years and 20,000 new university places for students from disadvantaged backgrounds. As flagged in the Government’s Jobs Summit, the National Skills Commission is being replaced by ‘Jobs and Skills Australia’ to undertake national workforce and skills planning.
Another method of addressing skill shortages is the annual skilled migration programs, which provides permanent and temporary visas for skilled workers in occupations identified as being in shortage. For 2022-23, the Government will increase the permanent Migration Program planning level from 160,000 to 195,000. Priority will be given to offshore applicants in skilled occupations in demand and to on-hand applications for the ‘Skilled Independent visa – New Zealand’ stream of applicants.
Total net overseas migration will be somewhat higher than the permanent migration quota due to long-term temporary visa holder movements. Treasury estimates that net overseas migration recovered to 150,000 in 2021-22 (after a net outflow of 85,000 in 2020-21) and will rise to 235,000 net arrivals per year from 2022-23.
Theme 3: Inflation and ‘cost of living’ pressures will ease eventually, but not immediately
This Budget is framed as a response to inflation and cost of living pressures. With regard to inflation, fiscal policy must work in tandem with monetary policy, to ensure that they are pulling in the same direction. Currently, both are seeking to pull inflation lower. In practice, this means no large new household spending programs, no rebates and no tax cuts that might fuel discretionary demand.
Instead, ‘cost of living’ relief is being provided through a ‘5-point plan’ that delivers targeted measures to discrete groups of households and will be implemented over several years. It includes:
- Increasing childcare subsidies, at an estimated to cost of $4.6b over the forward estimates period (the next four years) and eventually benefiting 1.2m families;
- Reducing the ‘co-payment’ (out-of-pocket) costs of specific PBS pharmaceutical items, at an estimated cost of $190m per year and benefiting 3.6m people;
- Expanding paid parental leave from 20 weeks currently to 26 weeks by July 2026, and improving access to paid parental leave for both parents. This is estimated to cost an additional $531.6m.
Disaster relief and planning assistance will also be boosted, with an additional $38m to Disaster Relief Australia to help support more than 5,000 volunteers and $200m per year to the Disaster Ready Fund for disaster prevention and resilience projects. Most of this is expected to go to regional communities. A separate investment of $22.6m will go towards reforms to address insurance affordability and availability issues in high-risk locations that are affected by natural disaster risk.
Theme 4: Strengthen Government’s economic policy focus on ‘wellbeing’ and fiscal sustainability
A wellbeing statement is added to the Budget this year. This is additional to the long-standing ‘women’s budget statement’ and serves a similar purpose. This statement is akin to an ‘ESG’ reporting framework (environment, social, governance) and will be expanded in coming years. In this first wellbeing budget report, Australia rates as ‘worse than the OECD average’ for household debt, but ‘better than the OECD average’ for housing affordability (defined here as the proportion of household disposable income that is left after paying housing rent, utilities and maintenance, but excluding the upfront costs or mortgage serviceability costs of housing purchases). Treasury has also modelled the impact of climate change on the economy as part of this budget.
Fiscal sustainability – or budget balance – is a long-term objective for all Government treasurers, but has been difficult to achieve over recent decades. This year, the deficit was reduced to $37bn by ‘windfall’ revenue gains from high resources prices and strong employment, but annual deficits are set to rise again from 2022-23, as the financial benefits of high commodity prices fade. Some relatively small savings were found this year, but the largest categories of spending – including healthcare, aged care, the NDIS and defence – are all set to keep growing strongly (over 6% p.a. in the case of health care and aged care). This long-term structural deficit will persist until spending can be reduced and/or revenue can be increased. In the meantime, government debt will grow and borrowing costs will rise, with higher interest rates hitting hard on a larger Government debt.
