Changing gears in a two-speed economy
“The first thing Josh Frydenberg should do in next Tuesday night’s budget speech is say sorry,” says Wayne Swan, the man whom the Liberals cut no slack after he failed as treasurer to deliver Labor’s promised budget surpluses. Neither a global financial crisis nor a massive collapse in export revenues were acceptable excuses to the Coalition back then.
There’s no doubt the “back in the black” budget, delivered by Frydenberg in April last year, went a long way to set up the come-from-behind Liberal election win a month later. But last Friday, far from delivering the promised $7.1 billion surplus for the financial year, the treasurer revealed a mind-blowing budget deficit of $85.3 billion. It is the biggest on record. And according to a raft of economic forecasters, the deficit he will announce for 2020-21 in next week’s budget will be north of $200 billion.
The treasurer will not offer a profound apology; instead he will proffer a lament. We got a taste earlier in the week when Frydenberg, at a joint news conference with the prime minister, said, “As we all know, Covid-19 has changed the world. Covid-19 has changed Australia.”
And further, recovery is under way everywhere except in the nation’s second-biggest state, Frydenberg said. “The Australian economy is operating at two speeds. There’s Victoria and then there’s the rest. Outside of Victoria the jobs have come back,” he said. The problem is that when 20 per cent of the national economy has been ravaged by the pandemic it presents daunting challenges as much if not more for the federal government than for the state.
Unlike Swan, Josh Frydenberg has been offered a leave pass by his political opponents, the Reserve Bank and any number of economists to abandon the Holy Grail of budget surpluses. Any misgivings on the government’s backbench have been muted.
Economist John Adams, a former Coalition government staffer, is in a distinct minority, urging a tighter rein on spending and a return to fiscal rectitude. Adams says “there is an entrenched consensus in Canberra that even if such political will existed, the Australian people would never accept austerity given the harsh short-term realities it entails”. A majority of Australians would surely be grateful for that.
Frydenberg has abandoned the previous strategy to deliver surpluses of sufficient size to significantly reduce gross debt and eliminate net debt by the end of the medium term. “Unfortunately, in the face of this shock,” the treasurer says, “this is no longer the prudent or appropriate course of action.” The benchmark for a return to this goal will be when “the unemployment rate is comfortably back under 6 per cent”. Deloitte Access Economics, in its Budget Monitor, believes this is beyond the next scheduled election in 2022.
A measure of the strange and unprecedented times is the fact the $314 billion in support for the economy that the government has announced since the pandemic began is widely believed to be not enough. Frydenberg’s rules for the government’s responses – to be “timely, targeted and proportionate” – are hostage to the vagaries of the virus. A second wave in another state, or indeed a third wave in Victoria, would render obsolete the four-year forecasts and projections the treasurer will unveil next week.
Prime Minister Scott Morrison says the budget will be “one of the most – if not the most – important … since the Second World War”. It will unveil “the strong plan we have for recovery … to build our economy for the future, to continue to cushion the blow”. But the Australian arm of the global consultancy EY this week warned that “withdrawal of the current crisis response stimulus means Australia faces an income support cliff, at a time when an insolvency cliff, productivity cliff and construction cliff also loom large”.
Modelling by EY “suggests that a mix of policies, including personal income tax cuts, maintaining a higher JobSeeker payment rate and infrastructure spending, would be effective”. EY’s chief economist, Jo Masters, has a lifeline for a prime minister contemplating a platform for re-election in the second half of next year. “Fiscal spending of about $60 billion over the next two years,” she says, “could lower unemployment by about 1 per cent.”
Two of the cliffs EY is warning about can be linked directly to the scaling down of the JobKeeper wage subsidy. There is no doubt many businesses kept solvent by the payment will fall over with its withdrawal. This fact was dramatically brought home by the ABC Four Corners report showing two out of three businesses in the New South Wales coastal resort town of Byron Bay are accessing the payment to keep employees on the books and paid. These businesses are being hit by the decline in domestic and international tourism. Their plight is shared by companies around the nation.
Shadow treasurer Jim Chalmers says it makes no sense for the Morrison government “to be ripping out vital support from the economy without a comprehensive jobs plan to replace it”. His leader, Anthony Albanese, is now foreshadowing that he will detail key elements of a jobs plan in his reply to the budget on Thursday night.
One thing the government seems to be baulking at is a massive boost to social housing. Government sources say it’s up to the states to pull their weight and borrow the millions needed to meet the estimated 433,000 shortfall in the sector.
The housing sector generally is vulnerable to the collapse in immigration. Frydenberg said last week Australia’s population growth is expected to slow to its lowest rate in more than 100 years. Migrants, on average, are younger and they bring with them demand for housing and, by program design, skills that are needed. Net overseas migration, according to the July budget update, is expected to fall from about 154,000 in 2019-20 to about 31,000 in 2021-22. This alone will be a considerable hindrance to a strong economic recovery, particularly in Victoria.
While Morrison and Frydenberg can claim that Australia is weathering the pandemic in health and economic terms better than most countries, there is a wide expectation in party circles that the prime minister will go to an election in September next year. That would avoid the risk of things getting worse in the enduring unpredictable circumstances. Some Liberals believe Morrison would prefer a double dissolution taking out the whole senate as a way of keeping the numbers in the upper house skewing more to the right. Malcolm Turnbull did it in 2016 and it worked to a point.
But South Australian independent Rex Patrick, who has quit the Nick Xenophon-founded Centre Alliance to run on his own team ticket, doubts Morrison will do it. He told me the PM would not want to risk having in the parliament a clutch of Pauline Hanson or Clive Palmer senators, such as the ones Malcolm Turnbull had to deal with. He may be right but Morrison, according to those who have worked with him over the years, will keep his options open.
The prime minister would need a double dissolution trigger where the senate rejects a government bill twice. So far he hasn’t got one but a Liberal told me it wouldn’t be hard to revisit the union-busting industrial relations bill shelved when the pandemic demanded national unity. Senator Patrick says that would be the Liberal leopard regaining its spots.
Morrison certainly returned to old form when he jumped boots and all into the waterfront dispute between Patrick Terminals and the Maritime Union of Australia (MUA). He took at face value the aggressive company’s characterisation of the dispute as all the union’s fault. On Monday the government signalled intervention in the dispute at the Fair Work Commission. A key reason nominated was the “medical supplies” among the 90,000 containers held up by the union’s overtime bans and work-to-rule tactics. Morrison railed against the “militant end of the union movement effectively engaging in a campaign of extortion against the Australian people in the middle of the Covid-19 recession”.
MUA national secretary Paddy Crumlin accused the company of “bullying” its workers and said claims that 90,000 containers were being held up was “absolutely fake news. You know à la Donald Trump bullshit.” On ABC TV’s Afternoon Briefing he said Patrick’s own management incompetence closed Port Botany for 48 hours when a maintenance contractor cut through electrical wires.
Accusations flew both ways with Patrick’s chief executive, Michael Jovicic, accusing the union of bad faith bargaining during the past seven months. But in a blow to Morrison’s spectre of the nation running out of medical supplies, Jovicic admitted no shipping contractor had approached him to move urgent stocks. He said he would co-operate with the union if they did.
The chief executive of Medicines Australia, Elizabeth de Somer, was at pains on RN Breakfast to assure listeners there was no looming shortage of supplies and no need for panic. She said current stocks would last three to six months.
Albanese saw the threat to bring troops onto the wharves as Morrison “being over the top”. The Labor leader said it was the prime minister running a “distraction”. The government’s problem is it will take more than confected outrage over the MUA to distract from the damage the coronavirus has done to the budget.
This article was first published in the print edition of The Saturday Paper on Oct 3, 2020 as "Changing gears in a two-speed economy".
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