Treasurer Josh Frydenberg risks double dip recession in big budget ‘mistake’

Economists have warned Josh Frydenberg’s plan could leave Australia vulnerable to a “double dip” recession that would make us all worse off.

Economists have sounded the alarm that Treasurer Josh Frydenberg’s bold new budget strategy risks a “double dip” recession that could prolong the economic pain.

After preaching the mantra of the “back in black” approach to the budget for years, Mr Frydenberg announced today that red is the new black.

The budget, to be handed down on October 6, will be bleeding red in the wake of the COVID-19 recession and now the Treasurer has warned voters not to expect a pathway back to a surplus for years.

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The budget was pushed back to October due to the pandemic. Picture: NCA NewsWire / Gary Ramage

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In an attempt to save jobs and get the economy growing again, the Morrison Government is promising big spending measures over the next two years to encourage investment and boost employment.

But the Treasurer has also set a new benchmark for when he will start to recalibrate the strategy back towards reducing debt and deficit, and that’s when unemployment hits six per cent.

The problem is the magic number is way too high according to some economists and risks plunging Australia back into recession.

Chief economist with the Blueprint Institute, Steven Hamilton, told news.com.au the threshold nominated by the Treasurer was “a mistake”.

“The threshold they have used is far too high. It’s still an economy in severe recession that requires significant stimulus. To give up on the fiscal task so early in the game would be a big mistake,’’ he said.

“There are currently 920,000 unemployed people. The current unemployment rate is 6.8 per cent. So the best case scenario is they will start cutting the budget when 800,000 of those people are still out of work. That is nowhere near ‘mission accomplished’.

“They would risk something like a double dip recession if you pull out stimulus too quickly. That’s the big risk.”

The Morrison Government’s challenge is to limit the economic damage from coronavirus. Picture: NCA NewsWire/Joel Carrett

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With interest rates at record lows, Dr Hamilton warned there wasn’t a lot more that the Reserve Bank could do to stimulate the economy so it was up to the Morrison Government to pile on the stimulus to keep the economy afloat.

“We have the first recession in thirty years. The RBA has said we are out of ammunition. So what we expect in the budget is that they need to step up to the plate,’’ he said.

“We already have things like JobKeeper and JobSeeker (coronavirus supplement) being withdrawn.

“The state of the economy with 6 per cent unemployment is horrendous. So I worry they are going to pull out stimulus too early.”

In a speech delivered in Canberra on Thursday, Mr Frydenberg said he was fighting “a recession like no other in living memory.”

“After years of hard work repairing the nation’s finances, the Budget was back in balance and spending was under control,’’ he said.

But given the depth of the economic shock Australia faces he conceded the economy will require continued support to enable it to recover and rebuild for the future.

“It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates — given what this would require us to do in terms of significant increases in taxes and large cuts to essential services,’’ he said.

“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.

“The first phase of our revised fiscal strategy is focused sharply on boosting business and consumer confidence and promoting jobs and growth throughout the economy.

“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.”

While the unemployment rate in August was 6.8 per cent, he warned that is expected to rise over coming months due to the lockdown in Victoria and as people re-enter the labour force to look for work.

Labor’s treasury spokesman Jim Chalmers also backed concerns over the 6 per cent unemployment target to trigger a shift in strategy.

“It is extremely concerning that the Morrison Government thinks an unemployment rate of 6 per cent is good enough, or would be a good time to go back to the sort of cuts we’ve seen from them before,’’ he said.