(Bloomberg) --

By Michael Heath(Bloomberg) - Australia will run its economy even hotter, joining the U.S. and Europe in holding open the fiscal spigot in tandem with monetary policy as they try to drive down unemployment and revive inflation.Treasurer Josh Frydenberg’s 2021-22 big budget spend aligns both economic orthodoxy and the political needs of a government with an election due in a year. The deficit will be A$106.6 billion in the 12 months through June 2022, exceeding economists’ A$80 billion estimate. That reflects higher outlays for infrastructure, aged care and tax breaks.“The government will secure the economic recovery by taking further action to support private sector-led growth and drive down the unemployment rate,’’ the 2021-22 budget papers said Tuesday. “Economic growth is essential to maintaining a strong and sustainable fiscal position.’’Frydenberg is setting aside budget repair to join forces with the Reserve Bank in trying to revive stagnant wages and weak inflation. Yet, the government is giving itself scope for upgrades by conservative iron ore and jobless rate forecasts.Treasury estimates iron ore will fall back to $55 a ton by the end of March 2022. It also sees 4.75% unemployment in June 2023, a quarter percentage point higher than the RBA’s latest estimate.The budget acknowledges “upside risks’’ for commodities as industry liaison suggests iron ore could remain elevated for an extended period. “Meanwhile, a stronger recovery in steel production outside of China could also provide further support for iron ore and metallurgical coal prices,’’ it said.Australia’s economy is in a V-shaped recovery as early containment of Covid-19 boosted confidence that, combined with fiscal and monetary stimulus, unleashed household spending and business hiring. Frydenberg said in his speech that the budget measures would help create more than 250,000 jobs by June 2023.

The government has set aside concern about debt for now, reflecting low borrowing costs and a better starting position than global peers.

Net debt is expected to be at 34.2% of GDP in June next year and peak just shy of A$1 trillion in June 2025, or 40.9% of GDP. That’s about half the U.S. and U.K. levels and about one-third of Japan’s, according to the government.

Yet the road to an election by next May is clouded by a sluggish vaccination rollout. The budget assumes overseas borders will remain closed until the middle of next year, suggesting Prime Minister Scott Morrison will be campaigning for another term while the rollout is still unfolding.

Another year of hardship for tourism and education is reflected in the budget allocating A$2.1 billion in support for aviation, tourism, the arts and international education providers.

Among other key spending items in Frydenberg’s fiscal blueprint are:

• A$7.8 billion to extend tax relief to low- and middle-income earning Australians
• A$20.7 billion for the extension of a temporary program for expensing and loss carry-back for assets bought by firms that has already supported a rebound of machinery and equipment investment
• A$15.2 billion in new commitments for road and railway projects across Australia
• $17.7 billion for the employment-intensive aged care sector; and
• A$1.9 billion for the Covid-19 vaccination strategy

Australia’s success in navigating the economy through the pandemic is clouded by a downward spiral in ties with its largest trading partner, China.The budget papers acknowledged the threat in a thinly-veiled reference. “Ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports,’’ they said.There's little sign of tensions abating. China last week announced it was suspending a ministerial economic dialog, while Australia is reviewing whether to force a Chinese company to sell a lease to a strategically significant port used by the Australian and U.S. militaries.The government also faces increased pressure to step up efforts to cut greenhouse gas emissions as a consensus emerges among developed nations led by President Joe Biden. The budget response is limited. It sets out A$1.6 billion for priority clean energy technologies. Still, the domestic economy is set to roar and the Australian electorate historically reward governments that demonstrate strong economic management. Treasury forecasts GDP will rise 5.25% this calendar year, before cooling to 2.75% in 2022.

“The outlook remains positive, though considerable risks remain,’’ the budget said. “Australia’s success in containing the health crisis to date has underpinned the economic recovery, but continued growth will rely on the effective containment of any Covid-19 outbreaks in Australia, including those that may arise from any new strains of the virus.’’

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