Tom Minear: Economic recovery hinges on Aussies’ hip pockets
With Australia in the middle — or really only at the start — of a once-in-a-century recession, the stakes for next Tuesday’s budget could not be higher. No matter which way you vote, we need Morrison and Frydenberg to succeed, writes Tom Minear.
Opinion
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Expectation management is part of the art of politics.
As Josh Frydenberg put the finishing touches on next Tuesday’s federal budget, setting the right tone was on his mind.
“I’ve always wanted to under-promise and over-deliver, rather than create unrealistic expectations,” the Treasurer said.
It was hard to escape the irony, given Frydenberg vowed last year that the Coalition would return the budget to surplus in 2020. No ifs, no buts. There were even “Back in Black” mugs.
He didn’t see COVID-19 coming — no one did — and that promised surplus has turned into a deficit expected to top $200bn, as Australia’s debt spirals towards $1 trillion. These record figures are why Scott Morrison has lifted expectations.
“This budget will be ... one of the most important, if not the most important, since the Second World War,” the Prime Minister said.
With Australia in the middle — or really only at the start — of a once-in-a-century recession, the stakes could not be higher.
Morrison and Frydenberg have three priorities for the budget: jobs, jobs and jobs.
No matter which way you vote, we need them to succeed. The question is: what if they don’t?
After his bold pronouncement this week, Morrison was asked exactly that. We’ll come back to his answer later.
The budget is five days’ away but we have a clear idea of some central measures.
Frydenberg and Morrison have willingly fuelled expectations that income tax cuts due in 2022 and 2024 will be brought forward.
Under their long-term plan, more than 10 million low and middle income workers have already been receiving a tax cut, with about 4.5 million winning $1080 in annual relief.
From 2022, the top threshold for those in the 19 per cent tax bracket is due to increase from $37,000 to $45,000, while the top threshold for those paying the 37 per cent rate rises from $90,000 to $120,000.
Two years later, a flat 30 per cent rate is due to be applied to everyone earning $45,000 to $200,000 — seven out of 10 workers.
Labor unsuccessfully argued against this at last year’s election, and even before the fast-tracked cuts are confirmed, criticism is again mounting about disproportionate benefits to well-off Australians.
That argument is overheated. In 2018, the top 5 per cent of taxpayers paid 32.7 per cent of all income taxes. By 2025, they will pay 32.9 per cent.
The bigger problem is whether this particular tax relief formula will deliver the economic jolt Australia needs. For a start, it can only be fast-tracked to the next financial year.
That’s nine months away, and many businesses cannot wait that long for customers to start spending again.
At an estimated cost of $21bn in 2021-22, accelerating the plan would deliver considerable hip-pocket relief.
But the government will only get bang for its buck if Australians don’t use the extra cash to pay off their mortgages or refill their savings.
From a purely economic perspective, a useful by-product of doubling the JobSeeker unemployment benefit for six months was that most people on that payment spent it every fortnight to cover their needs.
Someone earning six figures won’t be living hand to mouth, meaning they may not want or need to spend what they save in tax.
Morrison and Frydenberg have indicated the budget will also help pensioners, after the benefit rate remained frozen because inflation went backwards.
That extra support is tipped to be a one-off payment, following two $750 handouts delivered during the pandemic. Like those on JobSeeker, pensioners are more likely to need to spend that extra cash, stimulating the economy.
The budget will also include incentives to get businesses hiring and spending, such as an investment allowance and cash payments for employers who hire people on the dole.
Will all of this work? Will it create jobs, jobs and more jobs?
Morrison seemed confident this week. He said boosting demand was “very important in this recovery phase”, and the government’s plans were “temporary, targeted and proportionate”.
He and Frydenberg have no intention of increasing taxes or cutting essential services — everything they are doing is aimed at growing the economy.
The federal government cannot do that alone.
The states must pull their weight, with the Reserve Bank calling for a $40bn spending blitz.
Daniel Andrews is talking the talk, promising the biggest recovery package in the state’s history, although some moves he has already made — such as deferring payroll taxes rather than waiving them — have concerned the commonwealth.
Of course, Victoria and the nation can only succeed if the pandemic is brought under control.
And while Morrison seems confident, the budget cannot guarantee the one thing the economy needs more than anything: confidence.
Only a vaccine can deliver that.
Given the world has never successfully produced a coronavirus immunisation, it is the ultimate challenge of expectation management.
Tom Minear is Herald Sun national politics editor