Josh Frydenberg’s radical plan for the economy

Josh Frydenberg wrangles a koala on a visit to a Perth wildlife park. Picture: Philip Gostelow

All investors need to understand the radical strategy that Treasurer Josh Frydenberg is mapping out for the Australian economy.

If it works then we are headed for a period of sustained prosperity which is wonderful news for the Australian share and bond markets. Successful investment will require close monitoring of how well this strategy is progressing. Indeed Frydenberg issues a caution that his strategy is subject to major overseas economies not falling apart.

The two radical strategies are buried in Josh Frydenberg’s speech to the Australian Chamber of Commerce and Industry. They represent a new way of managing an economy in the post COVID-19 environment.

Josh Frydenberg tells us that Treasury has made two significant conclusions about the economy in coming years.

The first is that whereas Treasury previously believed that unemployment under a 5 per cent would cause a wages and inflationary breakout, they now believe that Australia can allow unemployment to go as low as 4.5 per cent before wage breakouts become a danger.

Unemployment is currently around 5.6 per cent

If Frydenberg and Treasury are right that allows stimulation to reduce unemployment to last for a much longer period.

If I was treasurer and received that advice from Treasury I would do exactly as Frydenberg has done. “Go for it!”.

The fact that there is an election next year would not be lost on me.

But my experience in the real world tells me there are hazards that will be need to be monitored very carefully.

For example Frydenberg is pushing deep into what the older people in the community often unfairly describe as the “dole bludger” community. In other words, fit young people who organise themselves to live on social benefits. I emphasise that the bulk of people on social benefits really need them, particularly older people. In the pandemic, when social benefits were greater, the “dole bludger” community rose dramatically and many turned their nose up at jobs they didn’t like. Again the majority of those receiving benefits---particularly older people--- really needed them because the jobs were not there.

To take the unemployment rate below 5 per cent means that employers will need to take on people who are not familiar with work. And they will need to do that within the harsh unfair dismissal rules which will make them nervous. But it’s worth the try.

Josh Frydenberg has warned his strategy is subject to major overseas economies not falling apart. Picture: Colin Murty

Another risk area is the question of skills. I don’t think we have the skills to undertake the big increase in capital expenditure that is in the pipeline. We can overcome some of the gap by attracting retired skilled workers back into the workforce (and also older people with less skills who are struggling to get a job).

And of course we desperately need to train younger people, as well as provide refresher training for older retired skilled workers.

But, in my view, the momentum coming forward is so great that we will also need to attract skilled workers from overseas on a large scale. That means having quarantine facilities that work. The Northern Territory has the right model. Victoria has a “NT style” proposal near Melbourne airport but wants Commonwealth money. Because of the Frydenberg strategy Canberra should back it, but also set up a similar one in Avalon because there’s a lot of people, including students, to bring in. There will be other places around the country where “NT style” facilities can be established.

Frydenberg is also embracing safety in government borrowings and has increased the amount of 20 and 30-year bonds to lock in current low rates and to protect the government from a sudden overseas rate surge. Top Australian companies can borrow 10-year fixed rate money on the bond market and many are doing just that. Those with housing loans should follow the Treasurer and make sure part of their borrowing is at a fixed rate for four or five years

The second Frydenberg / Treasury base strategy returns to radical country. I found it a fascinating approach to the business of running a nation’s economy.

This strategy assumes that as the GDP rises so the economic base of the country increases, which boosts revenue. Treasury believes that nominal GDP will exceed the nominal interest rate for at least the next decade – ie economic growth will more than cover the cost of servicing our interest payments.

If the economy is growing faster than nominal interest rates then the current settings can be maintained and debt will fall as a percentage of GDP. Interest rates and inflation must not rise dramatically.

If Frydenberg is right and we can limit inflation with close to 4.5 per cent unemployment then we can partly insulate ourselves from overseas rate rises.

The danger is of course that lower unemployment and skill shortages will cause wages and inflation to break out and require a whole set of strategies that will adversely impact the share market.

In the meantime the “Frydenberg boom” is set to continue well into 2022 and perhaps beyond.