Photo by Ken Cheung on Unsplash

The 2020-21 Federal Budget assumes the next 12 months will be a dream journey of economic healing and recovery. A number of dramatic measures and additional expenditure have been allocated to allow the economy to recover from its paralysed condition due to COVID-19.

This is a budget characterised by the intensification of debt and budget deficit. When Labor used the same two strategies to revive the economy during the global financial crisis, the Liberal Party slammed it, but they are now the cornerstone of Treasurer Josh Frydenberg’s strategy to spend our way to growth.

While the Treasurer clearly struggled under intense questioning by the ABC’s Leigh Sales on why the Morrison Government had decided to recycle the same trick, the answer is quite simple: the strategy of increasing debt and running a budget deficit wears two different hats, depending on the circumstance and causation of the crisis.

The 2008 Global Financial Crisis was caused by excessive debt levels in financial markets and households having low capacity to repay debt. In contrast, the current COVID-19 crisis is an economic shock caused by an unprecedented factor – the virus.

The current budget has a targeted purpose for growth and productivity

Compared with 2008, the basis of Australia’s sovereign debt structure and its ability to pay is very strong. That means we have enough capacity to increase debt and can afford to run a budget deficit to allow for our economic recovery.

Australia is one of only a handful of countries to have maintained an AAA credit rating through the current global recession. Compared to the 2008 Global Financial Crisis, the sovereign debt conditions is in a much better state meaning we are in a better position to be able to afford splashing out on stimulus.

Current increase in government debt has a targeted purpose for growth and productivity and its productive outcome can be achieved if it is closely monitored. Prior to COVID, our government was in a good shape (relative to other comparable economies) for a fiscal surplus. Therefore, taking out debt to keep the economy afloat makes Australia’s status no different than other countries and it helped maintaining its competitiveness. This means it was certainly a productive use of debt.

Then to take more debt to re-build the economy is also a genuine use especially given Australia has maintained its AAA rating. In contrast, during 2008 Global Financial Crisis period, our sovereign debt condition was in a poorer state and therefore taking on more debt to splash on with no targeted purpose – was a poor choice and unproductive use of debt.

Instant asset-write offs should include multinationals

Frydenberg’s budget was well articulated, encouraging much-needed investment with better incentives for research and development and injecting more money into the economy through personal tax cuts and instant asset-write offs.

All these measures are strong ways to boost businesses and will hopefully have flow-on effects leading to increased employment, which in turn should lead to economic recovery and steady financial growth.

The instant asset-write offs are only applicable to businesses with turnover of less than $5 billion and this may need a revision, especially for large multinational corporations, which should be supported because they would be the primary focus of R&D and innovation, and would contribute to much-needed tax revenue for spending on infrastructure, the health system, education and supporting senior citizens with better pensions.

Built on dreams, yet the most realistic way

The economic recovery from the COVID-induced recession won’t be easy and we’re unlikely to fully recover the pre-COVID levels of prosperity at least for the next couple of years. But the stimulus packages outlined in the budget have the right mix of ingredients to kick-start the economy on that long road to recovery.

This budget may be built on dreams, but it might also be the most realistic way to move forward if Australia wants to get back on its feet and start rebuilding for the future.


Other Budget Forum 2020 articles

Blink and You’ll Miss It: What the Budget Did for Working Mums, by Miranda Stewart.

Economic Stimulus through a Gender Lens: Why the Budget Did Not Deliver, by Helen Hodgson.

Progressivity and the Personal Income Tax Plan, by Sonali Walpola and Yuan Ping.

Training Subsidies and Market Failures, by John Freebairn.

Getting Coherence into the Equity Debate – Part 3, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 2, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 1, by Andrew Podger.

What Has Volunteering Got to Do With the Budget? By Sue Regan.

Talk of Aspiration Is Not Borne Out in Federal Budget Papers, by John Hewson.

Asymmetric Taxation of Business Income and Losses, by John Freebairn.

Economic Security for Older Partnered Women and Widows: Fixing Gaps in Australia’s Superannuation System, by Monica Costa, Helen Hodgson, Siobhan Austen and Rhonda Sharp.

Heroic Assumptions in Budget Omit One Major Threat: A Global Debt Crunch, by John Hewson.

Will Instant Asset Write-Offs Boost Jobs? by Michael Coelli.

It’s Not the Size of the Budget Deficit That Counts; It’s How You Use It, by Steven Hamilton.

Looking for Bold Reform? Get Rid of Payroll Taxes, by Robert Breunig.

It’s Time to Meet Key Social Policy Challenges in COVID Recovery, by John Hewson.

Meet the Liveable Income Guarantee, a Budget-Ready Proposal That Would Prevent Unemployment Benefits Falling off a Cliff, by John Quiggin, Elise Klein and Troy Henderson.

COVID-19 Strengthens Australians’ Belief in the Fair Go, Government Should Support the Vulnerable, by Emma Dawson.

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