Budget 2021: Pandemic-era spend is new normal

Pandemic-era government spending will become entrenched in a ‘new pattern’ of fiscal largesse from conservative governments, according to former RBA board member John Edwards.

Economist and former Reserve Bank board member John Edwards.

Pandemic-era government spending will become entrenched in a “new pattern” of fiscal largesse from conservative governments, according to former Reserve Bank board member John Edwards.

Tuesday’s budget showed spending as a percentage of GDP would peak at 32.1 per cent in 2020-21. The measure would fall away sharply in following years as the impact of temporary stimulus measures rolled off, but the budget papers showed it would remain at 26.2 per cent by the middle of the decade.

“At no time in the past half century has a Liberal, conservative government spent as much as a share of GDP as was spent last year, and will be spent in this and the coming financial years,” Mr Edwards, a senior fellow at the Lowy Institute said.

The previous peak in spending as a proportion of GDP was 27.6 per cent in 1984-85 coming out of the early 1980s recession and when Paul Keating was Treasurer.

“In two years’ time this level of spending is sort of normal – it’s not pandemic recovery spending,” Mr Edwards said. “It’s not just one budget; according to the forward estimates, it’s now a new pattern in Australian politics.”

“This budget marks an ideological change also apparent in the UK, where conservative governments are meeting the opposition by spending a good deal more than their values had previously suggested would be possible.”

“It’s a real challenge for Labor to respond to this (budget) in a way that doesn’t betray their own values.”

But Mr Edwards flagged that the Coalition would inevitably have to make tough decisions on how to rein in spending, or face increasing the tax take to curb the deficit.

He said the budget forecast that annual spending would increase by under 1 per cent in outer years was “not very plausible”.

“Spending is really driven by population increases, and population increases will be higher than that.”

The Opposition on Wednesday sharpened its attack on the government’s additional $96bn in spending, claiming it was poorly targeted and simply added to the national debt burden without the dividends of higher long term growth and wages.

University of Melbourne economics professor Jeff Borland said he believed the additional policy measures announced since the mid-year economic and fiscal outlook, such as extending the temporary low and middle income tax offset and the instant expensing scheme for businesses, was “sensible”.

“The big question was whether the government would continue to try and stimulate, or whether they would try to pay back the debt,” Professor Borland said.

“Certainly they are doing the former – and that is all you need to know in general terms about what’s happening.

“Last year it was ‘throw money at households and businesses’ – I think that was a good approach in 2020. Now that we’ve got the economy back to where it is, that wouldn’t be the right approach.”

Josh Frydenberg on Wednesday again stated his government’s commitment to the third stage of its legislated personal income tax plan, which comes into effect in the 2024-25.

At an estimated annual cost of $17bn, the Treasurer insisted the cuts were affordable, despite the budget’s forecast of deficits stretching out for at least another decade.

KPMG chief economist Brendan Rynne said the stage 3 cuts – which would remove an entire tax bracket, leaving income earned between $40,000 and $200,000 taxed at a flat rate of 30 per cent – “were not affordable in the sense of trying to reduce the debt as quickly as possible”.

But Dr Rynne said “I think it’s well understood that having a fixation on returning the budget to balance either in the short term or even the medium term right now is the wrong objective.”