Reserve FC Informed Investor- November 2020

The Reserve Bank of Australia cut the official cash rate to a new historic low of 0.1%. The Treasurer released Australia’s latest Federal Budget. This was essentially a ‘no-surprises’ package of measures designed for Covid-19 challenged times.

Given the scope of the challenge, the budget deficit for 2020/21 was unsurprisingly large, at $213.7 billion, or 11.0% of GDP.

Even more importantly, deficits were forecast all the way out to 2030-31, resulting in gross debt rising from $872 billion in 2020-21, or 44.8% of GDP, to above $1 trillion, or 55% of GDP.
The virus has blown away Australia’s previously favourable budget position, where surpluses had been forecast for the next few years.

Medium-term projections were based on the potentially optimistic assumption that economic activity levels return to their pre-virus levels by the second half of 2021.

S&P kept Australia’s AAA rating on a negative outlook (implying a one-in-three chance of a downgrade in the next two years). The retention of this rating is mostly contingent on fiscal deficits narrowing from FY22 onwards, even with the announced tax reforms and new expenditure measures.

PDF VIEW: Informed Investor November 2020 Richard Shermon

Reserve Financial Consulting