Cooking up a storm on a turbulent budget sea

Tuesday’s budget is what it is: a cork bobbing on a turbulent cocktail sea of virus, hysteria and government-mandated recession.

Treasurer Josh Frydenberg in his office preparing for Tuesday’s budget. Picture: NCA NewsWire/Gary Ramage

Tuesday’s budget is what it is: a cork bobbing on a turbulent cocktail sea of virus, hysteria, government-mandated recession, here, there and everywhere except extraordinarily now for the home of it all — China — business and personal destruction and everyone waiting for the vaccine called Godot.

A billion of spending here, a billion there — even 10 billion here or there — pale almost into incidentality when we are talking about a one-year deficit north of $200bn and total deficits, optimistically, forecast to approach half-a-trillion dollars over the even more quaintly-than-usual titled “forward estimates”.

Treasurer Josh Frydenberg — and his recent partner and predecessor on the now-abandoned search for the Holy Surplus Grail, Prime Minister Scott Morrison — has been urged to abandon all restraint and spend “whatever it takes”.

Well, yes, and a very definite twined no, on a number of levels.

The first and overriding yes/no is the pointlessness of spending “whatever it takes” when and if the “taking”, so to speak, is prohibited from happening.

Unless and until government — actually, governments, plural; that’s one federal and three state governments — allow businesses to function, allow workers to have jobs, then fiscal pump-priming will be as ineffectively pushing on a string as monetary policy can so often be.

It is important in this context and others to distinguish between pump-priming like allocations for infrastructure spending and fiscal support, including tax cuts, for businesses and individuals to sustain their spending — the exact point of JobKeeper.

The former will only have a point if businesses are actually allowed to operate; the latter will sustain activity at some level and is indeed a moral obligation of government on behalf of the taxpayer, having used its power to destroy livelihoods and indeed even lives.

The three states that have to join the federal government in “ordering” the economy out of recession, to validate the effectiveness of pump-priming, are the three biggest, NSW, Queensland and of course the imprisoned state of Chairman Dan, Victoria.

Frankly, bluntly, the other three, WA, SA and Tasmania, and the two territories just don’t matter nationally — other than WA continuing to dig up and ship a billion tonnes of itself, all that rich red Pilbara dirt, almost all of it to China, every year.

If Premier Mark McGowan never allows another tourist to venture west across the Nullarbor, and the rest of Australia never sees another westerner grope their way through the sand east, the consequences for the national economy will be incidental.

So, yes, to the “what it takes” pump-priming provided the economy is opened up and kept open; businesses and workers are allowed to function.

At the same time it is entirely appropriate and I would suggest absolutely imperative that the government stick with its schedule of winding back both JobKeeper and JobSeeker — albeit, as I’ve argued, not all the way back to the old dole payment in the case of JobSeeker.

This might seem at odds: pump-priming married with anti pump-priming. It is not; JobKeeper specifically was a necessary but always temporary Band-Aid; sustaining it deep into 2021 would seriously undermine not just the macro environment but the micro one as well.

Further, it is sobering to note that the $70bn — currently programmed to be — spent on JobKeeper takes 2019-20’s $85bn deficit by itself past $150bn in this current year. That leaves a similar $70bn odd of further stimulus.

Then there’s the future, where the Treasurer (and PM) should — indeed, must — heed the critical lesson of the GFC and more particularly its aftermath. If not learnt, the consequences will be far more serious than they were through the 2010s.

The appropriate criticism of the (Wayne) Swan treasurer ship is not what was done in the white heat of the GFC and the febrile fear and numbing uncertainty in late-2008; but what was not done from late-2009 and more reasonably mid-2010 and on.

Spending in 2008-09 rose a stunning enough 12.7 per cent in real terms — the biggest single-year percentage increase since 1975-76 — when Treasury secretary Ken Henry’s “Go hard, go early, and go to households” met a PM in Kevin Rudd believing he was embarked on saving the nation, Churchill-style.

When you understand that the increase was mostly telescoped into just the second half of the fiscal year — the 2008 budget had initially forecast real spending growth of just 1.1 per cent — the 2008 budget was actually on at least a par with the infamous 1974 Whitlam budget which had real spending growth of 19.9 per cent, but spread over the year.

That 1974 Whitlam budget defined fiscal irresponsibility, perhaps for all down under time; the 2008 budget (as it emerged) was not simply appropriate but arguably exactly responsible.

The problem, the gross irresponsibility, the stunning failure of a treasurer and indeed a PM (two) and a cabinet, was what happened subsequently: the spending was never wound back as the crisis passed, thanks to zero rates and massive QE in New York and the Middle Kingdom bestowing the fruits of the Mandate of Heaven on Australia and Australia alone.

In 2009-10 the Rudd-Swan government increased spending by a further 4.2 per cent, so spending that year was 17.4 per cent higher in real terms that Peter Costello’s last budget in 2007.

Yes, it then flatlined in 2010, but in 2011 it was up by 4.8 per cent — the biggest single-year increase since 1992-93, excluding 2008 and GST-distorted 2000, and taking it to nearly a quarter higher, in real terms, than 2007.

That is the big lesson for Frydenberg. He must not build in sustained spending growth; he has to commit to actually winding back subsequently.

Remember the great lesson from Swan: the eternal power of schadenfreude.

Swan had his unfortunate 2012 budget opening: the “four years of surpluses I announce tonight.”

Frydenberg had his in 2019: “Tonight, I announce that the budget is back in the black.” Tuesday is locked in; the future is not.