PM budgeting on an election
Next Tuesday the treasurer, Josh Frydenberg, will up-end 40 years of Liberal Party ideology with a budget that will hugely increase spending and create deficits as far as the eye can see.
The small government, “trickle down” prescriptions championed by United States President Ronald Reagan in the 1980s, and zealously advocated by Australia’s conservatives right up until March 2020, will be consigned to history. They were never really fit for purpose and their limitations were dramatically exposed when the unvaccinated Australian economy was in grave danger of succumbing to the Covid-19 virus.
Those on the Labor side feel belatedly vindicated after the shellacking the Rudd and Gillard governments received for their debt raising, big government response to the global financial crisis. Then treasurer Wayne Swan says the Coalition’s embrace of Labor’s approach now shows “everything they argued and articulated was a fraud”.
But whether voters notice or care is another thing. More likely, they will continue to be grateful for Australia faring better than most other countries and for their governments keeping them safe.
For that reason, many see next week’s budget as an election primer. Some on the government backbench are convinced Morrison has already begun “fattening the pig ahead of market day”. Market day, to their thinking, is likely to be in October or November, before any Covid-19 risks materialise to stall or stymie the economic recovery. If a pandemic-related setback does occur, and it cannot be dismissed in light of the catastrophe in India and containment uncertainties everywhere, then the government’s record would not be so convincing.
This surely is the lesson of the Tasmanian election. The Liberal premier, Peter Gutwein, pulled off the equivalent of a landslide once you factor in the quirks of the Hare–Clark proportional voting system. Labor hardheads believe the premier’s opportunistic calling of an election a year ahead of schedule is a template that a finely tuned political animal such as Scott Morrison will find hard to resist.
Just how remarkable the recovery is was spelled out in Reserve Bank governor Philip Lowe’s statement after the bank left interest rates at their historic lows this week. Lowe is forecasting the economy to grow at its fastest calendar year rate in more than two decades. He expects Australia to reach full employment, which he defines as 4.5 per cent, by the end of next year. To sustain this growth, he is flagging that rates are “unlikely” to change before the end of 2024.
Economist Stephen Koukoulas says if he was the “incumbent government right now I would be very happy with the way things are”. The labour market is in better shape than it was before Covid-19 and there are signs inflation is returning in key areas, such as building, construction and commodities, which encourages optimism there is a more healthy economic pulse.
No doubt the treasurer will claim all the credit and it will be hard to begrudge him due recognition. This recovery was purchased largely by his massive spending and its survival depends almost entirely on it.
Our erstwhile fiscally conservative treasurer will unashamedly walk both sides of the street next week. He has already committed to not “undertaking any sharp pivots towards austerity” as he works hard to drive the unemployment rate lower. At the same time, Frydenberg insists the government’s “core values have not changed” and he remains committed to lower taxes, containing the size of government, budget discipline and guaranteeing the delivery of essential services.
It sounds a bit like the prayer of Saint Augustine before his conversion: “Lord make me pure but not just yet.”
Midweek the government was backgrounding journalists, saying speculation it would fast-track tax cuts for high-income earners was wrong. The government instead would be extending by a year the low- and middle-income tax offset, worth up to $1080.
At the National Press Club, economist Sarah Hunter said we are seeing a “sea change in how governments view fiscal policy and how it can be used in the economy”.
But she wondered if, on Tuesday, we were going to see the sort of sea change happening in Joe Biden’s United States or Boris Johnson’s Britain. Both governments of different political hues are facing up to “who foots the bill”.
Hunter said there was recognition that tax cuts for the wealthy had only served to widen income inequality and “it’s got to the stage where it’s too high”. She said it’s unsustainable and “we need to reverse the trend”.
Still, there are limits to new thinking. If this is a pre-election budget, as it definitely seems to be, then the Australian precedent would suggest neither Scott Morrison nor Anthony Albanese will follow Biden’s example and promise to raise the company tax and the income tax paid by the super-rich.
Imagine the Morrison government daring to follow the British Chancellor of the Exchequer, Rishi Sunak, in raising company taxes. Sunak, while giving some tax breaks to encourage business investment, also said it “would be irresponsible to allow our future borrowing and debt to go unchecked”.
The Morrison government’s record is to chase down the poorest in our society while allowing its business mates to pocket millions in JobKeeper subsidies they not only didn’t need but which they used to pay themselves bonuses and dividends. Nothing trickled down there, just ask multimillionaire Gerry Harvey, who told The Sydney Morning Herald he would not be paying back the approximately $6 million claimed by his electronics retailer Harvey Norman. He told the newspaper it was “a tiny amount” and claimed he would repay it through higher taxes. He was surely having a lend.
For now, Frydenberg is relying on the economic growth expected from his billions of dollars of stimulus to help pay for his borrowings. Certainly both sides of politics and most mainstream economists agree more people in jobs means less welfare spending and higher income tax revenue.
But fiscal conservatives in the government remain unhappy that Morrison and Frydenberg embarked on what they see as a Labor-style gargantuan cash splash. With an eye to appeasing them, The Australian was told that savings from unspent stimulus schemes will be used to fund major packages for aged care, mental health, the National Disability Insurance Scheme, childcare and veterans. The paper says this would reduce the projected deficit by as much as $40 billion. Still, on one estimate it will be an eye-watering $155 billion in 2020-21.
Labor’s “debt and deficit disaster” was 14 per cent of the economy; the Liberals are heading to a black hole three times that size.
But 13 years after the global financial crisis, this government’s political opponents welcome its spending for the support it gave millions of Australians.
The criticism now is that it is being gradually withdrawn and has done nothing substantial to address the inequalities in the system.
Shadow Treasurer Jim Chalmers says the welcome recovery is “patchy, uneven and hostage to uncertainty”. And midweek there was a jarring reminder of how tenuous it is, with a locally acquired Covid-19 case in Sydney. Urgent contact tracing swung into action to find the source. But the ever-present prospect of economically damaging lockdowns will remain with us, especially while our painfully slow and bungled vaccine distribution heightens the vulnerability.
It is hard to quibble with Chalmers when he says the recovery would be stronger “were it not for the prime minister’s fumbling of the rollout and quarantine”.
The government’s warning to the 9000 Australian citizens stuck in India – that they faced jail or punitive fines if they attempted to come home before May 15 – was stark confirmation of the quarantine failure. The government has had a year to get it right.
Its reliance on the sole Howard Springs facility in the Northern Territory was foolishly complacent.
Experts are warning the Covid-19 infection will be with us for years and yet the federal government has had to be prompted to look at another designated facility on Commonwealth land the Victorian government identified in Melbourne. Morrison now says he is seriously considering the detailed plan. No single line in the budget will be more important than the $700 million required to make it a reality.
Burying Ronald Reagan’s voodoo economic prescriptions has been a lucky break for the nation and won Morrison wide approval. Ironically, it seems to have made the prime minister a latter-day version of the late US president. He had a reputation as the “Teflon man”. Labor laments that, like Reagan’s, none of Morrison’s failures are sticking to him. Even he must wonder how long that can last.
This article was first published in the print edition of The Saturday Paper on May 8, 2021 as "Trickle down and out".
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