Photo by Edwin Hooper on Unsplash https://bit.ly/2Fc6tGR

You simply can’t buy business and consumer confidence, no matter how much you spend. To be fair, quite uncharacteristically for a Coalition government, it has certainly had a go, with both costly tax cuts and business incentives, but as Treasurer Josh Frydenberg conceded, “there is a monumental task ahead” to climb out of the black hole created by the response to COVID-19.

We’re definitely “back in black”, but we’re in that hole, not credit as hoped at the time of the last budget.

Overall, the government runs up a total of about half a trillion dollars in deficits over the next four-year budget period, hoping to return unemployment, from a peak of about 8 per cent, to 2019 levels by 2024. This drives net government debt to almost $1 trillion by 2023-24, some 44 per cent of gross domestic product. Apparently gross debt reaches almost $1.8 trillion over a decade.

The strategy is that, with all this fiscal stimulus, backed by the Reserve Bank holding interest rates down and standing behind the banks with liquidity support, together with eased lending constraints on the banks, and concessions on corporate insolvency, consumers and business will have the confidence to spend and invest, sufficient to deliver the promised jobs growth.

The main challenge – the “known unknown”, to borrow from former US defence secretary Donald Rumsfeld – is just how our economy will transition from direct wage support provided by JobKeeper, presently supporting the wages of some 3.5 million workers, or more than a quarter of the workforce, to indirect support through personal tax cuts and various business incentives.

The budget assumes JobKeeper will be phased out by next March, even though there is still considerable debate about whether this will indeed be possible. The government also still resists a commitment to JobSeeker beyond the end of this year, although it does introduce a subsidy for business to hire younger unemployed people, admitting they are particularly hurt by the recession.

Behind all this are some pretty heroic assumptions about how the virus will behave – specifically, that localised outbreaks will be contained, that Victoria’s restrictions are brought back in line with other states by year’s end, by which time state border restrictions will also be lifted (except Western Australia’s, which would wait until April 1), that a COVID-19 vaccination program is fully in place by late next year, and that international students and permanent migrants will return gradually through the latter part of 2021, along with low levels of international tourism.

We saw just how quickly similar assumptions in the July economic statement were negated by Victoria’s second wave of the virus.

The other key assumption is the significant collapse in budget revenue will be restored as growth returns, and most of the spending measures are “temporary” and easily reversible. This certainly is not clear, as “benefits” given can soon become “rights”, especially if the virus doesn’t behave as assumed and confidence isn’t restored as predicted.

Although Frydenberg was quick to point out our “better” economic performance compared with a number of other developed economies, the budget downplays the risks of the state of the global economy in assessing our prospects. For example, it assumes virtually a V-shaped recovery for the global economy: India from minus-9 per cent growth in 2020 to plus-9 per cent in 2021, Europe from -9 to +3.5 per cent, our major trading partners – -3 to +5.3 and 4 per cent, the world from -4.5 to +5 per cent.

Similarly, while the blowout in our debt-to-GDP ratio is alarming relative to previous expectations and government posturing about debt and deficit disasters, we are assured that ours is “low” by global standards – half the United Kingdom’s, a third of the United States’ and a quarter of Japan’s. We are also assured this debt is affordable, given our AAA credit rating, and with global interest rates so low, and likely to remain so. Indeed, it has been pointed out that the likely interest cost of our prospective debt is still less than it was in 2018-19.

However, it is an inherent weakness of global COVID-19 economic strategies to ignore possible longer-term consequences of massive monetary expansions by central banks (now totaling some US$7.3 trillion, according to the International Monetary Fund) and fiscal expansions by governments. Pre-COVID global debts totalled more than 225 per cent of world GDP, with the IMF predicting the median debt-to-GDP ratio to have increased by 17 per cent in advanced economies, 12 per cent in emerging economies, and 8 per cent in low-income countries by next year.

In these terms, the possibility of a pandemic-induced systemic debt crisis cannot be ruled out – a situation compounded by bubbles in many stock and property markets, all threatening stability in bond and currency markets.

Finally, the budget was devoid of any genuine reform, or a recovery reset. The initiatives regarding manufacturing and areas such as waste and climate are modest, and lacking in detail. The tax changes fall far short of reform in a tax system that is inefficient, inequitable, complex and riddled with many structural weaknesses. So too, with the lack of reform with vocational training, research, and higher education initiatives –and with aged and child care yet to come.

The budget has squandered the opportunity to seize the moment and set out a framework for the inevitable transition to a low-carbon Australia by mid-century, sector-by-sector.

First published at the Sydney Morning Herald on Wednesday 7 October 2020.

 

Other Budget Forum 2020 articles

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.

Dream Budget or Not? by Shumi Akhtar.

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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