Coronavirus: Frydenberg says government will abandon budget surplus
Treasurer Josh Frydenberg has confirmed paying down debt and returning the budget to surplus will no longer be the government’s priority in the wake of the COVID-19 recession.
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Paying down debt and returning the budget to surplus will no longer be the government’s priority under a major economic policy shift in the wake of the COVID-19 recession.
Treasurer Josh Frydenberg has confirmed the government will abandon its pursuit of a surplus in the near future, and will not seek to address the high level of public debt until Australia’s unemployment rate is “comfortably” below six per cent.
“Under the previous strategy our plan was to deliver budget surpluses of sufficient size to significantly reduce gross debt and eliminate net debt by the end of the medium term,” he said.
“Unfortunately, in the face of this shock, this is no longer the prudent or appropriate course of action.”
Mr Frydenberg said it would now be “damaging” to the economy and “unrealistic” to target surpluses over the forward estimates as it would require “significant increases” in taxes and “large cuts” to essential services.
“This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position,” he said.
“It is getting Australians back to work and having profitable businesses hiring and investing that offers the greatest leverage in repairing the budget.
“So in the Budget in less than two weeks’ time, we will be recalibrating our fiscal strategy to match the circumstances we now find ourselves in.”
Mr Frydenberg said the first phase of the revised strategy would focus on boosting business and consumer confidence, and promoting jobs and growth.
“Our first priority must be to secure a strong and sustained economic recovery and drive the unemployment rate down as fast as possible,” he said.
“We will review progress on the economic recovery in each Budget update, but I expect Phase 1 to remain in place until the unemployment rate is comfortably back under 6 per cent.”
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Mr Frydenberg said once the government was confident the recovery has taken hold, it would move to Phase 2 of the strategy, focused on “restoring” Australia’s fiscal position.
“First, we will maintain our central focus on jobs and growth, combined with structural reforms that increase our economy’s potential,” he said.
“Second, there will be a deliberate shift from providing temporary and targeted support for the economy to stabilising gross and net debt as a share of the economy.
“Third, we will start the hard work of rebuilding our fiscal buffers, so that we can be prepared for the next economic shock.”
Mr Frydenberg said throughout the response the government would retain its 23.9 per cent cap on the tax to GDP ratio.
Mr Frydenberg warned Australia’s economy would be “persistently smaller” as a result of the pandemic than originally forecast.
“By the end of 2020-21, Australia’s real economy is expected to be around 6 per cent smaller than forecast in the 2019-20 MYEFO,” he said.
Mr Frydenberg said Australia’s future population would be “smaller, and older,” than previously assumed because of the “sharp drop” in net overseas migration.
“As published in the July update, net overseas migration is expected to fall substantially, from around 154,000 in 2019-20, to around 31,000 in 2020-21,” he said.
“The Budget is expected to reveal a substantial decline in Net Overseas Migration compared with the figures in the July Update, with net migration outflows now likely in both 2020-21 and 2021-22.”
Mr Frydenberg said while migration would “eventually” return to normal levels, “lost migrants will not be replaced”.
“Given our migrant workers tend, on average, to be younger, this will lower labour force participation and average hours worked across the economy into the future,” he said.
The Treasurer said the high levels of unemployment would mean wages would be “persistently lower”.
“Wages growth is ... likely to remain subdued for at least the next few years, until the jobs market tightens,” he said.
The government will also have lower tax receipts from personal income and the corporate sector.
“Income taxes will grow more slowly, reflecting a smaller wages bill,” he said.
“Corporate taxes will also grow more slowly, reflecting lower profits and economic activity.
“This is because businesses are able to deduct losses that occur during downturns against profits in future years, lowering the tax they would otherwise pay.”
New bankruptcy lifeline for struggling small business
Small businesses on the brink of collapse due to COVID-19 will be thrown a job-saving lifeline to restructure and stay afloat through massive reforms to bankruptcy rules.
Struggling owners will no longer be burdened with the huge cost of going through voluntary administration when they hit financial trouble, provided they can reach an agreement with creditors under a faster and simple new scheme starting January 1.
Treasurer Josh Frydenberg will on Thursday unveil permanent changes to insolvency rules shifting away the current “one size fits all” system the federal government believes is reducing the opportunity of small businesses to restructure and survive.
About 400 Australian companies have entered administration each month of the pandemic — a number likely to soar once current temporary insolvency changes and other supports wrap up.
Normal rules would force small business operators swamped with debt due to the COVID-19 shutdown to hand over the reigns to an external administrator at significant cost.
But under the new proposed process, small businesses with liabilities of less than $1 million would be able to seek reorganisation advice from insolvency experts for a flat fee.
If the company’s board agrees to appoint the expert — known as a Small Business Restructuring Practitioner (SPRB) — a plan to restructure will then be developed within 20 business days.
During this time, the owners continue to control the business and can trade as normal, with special rules kicking in preventing unsecured and some secured creditors from taking action against them.
These protections are the same as what would ordinarily apply in voluntary administration, except in this instance the owners maintain control of their company.
The SBRP then sends a repayment plan to creditors, certifying the small business is able to meet the terms, and if at least half of those owed money agree the owners can continue operating while paying down the debt.
Mr Frydenberg said the “significant reforms” would help keep more businesses afloat and sure up jobs.
“The reforms are a critical part of our economic recovery plan and will help to boost business
confidence and dynamism across the economy by allowing viable businesses to survive as our
economy rebuilds,” he said.
“(They) draw on key features of the US Chapter 11 bankruptcy process allowing small businesses to restructure their debts while remaining in control of their business.”
Assistant Treasurer Michael Sukkar said the government believed a “one size fits all approach” to insolvency did not “work” for small business.
“We also believe that a small-business owner should get the opportunity to decide on how to
reorganise their business or whether to wind down,” he said.
“These fundamental reforms will give nearly 80 per cent of business owners the opportunity to consider their options in a more timely and cost-effective way.”
Mr Sukkar said the government wanted businesses to recover “strongly” when the pandemic has passed.
“It will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner,” he said.
The government’s reform package also includes a simplified liquidation pathway for small businesses to quickly dissolve and be better placed to pay money owed to employees and creditors.
The measures are due to start in 2021, provided legislation passes parliament.