Treasurer Josh Frydenberg has crafted a budget that pivots the economic response to the COVID-19 pandemic from emergency measures to support households and business confidence, to a long-term recovery plan that seeks to find employment for the many thousands that have found themselves to be suddenly jobless; builds infrastructure, and cuts incomes taxes.
Most importantly, the strategy allows the government’s spending taps to stay wide open until there is a meaningful improvement in the job market – an unemployment rate below 6 per cent to be precise.
Australians will cheer on the strategy at first, but choke when they come to ponder the cost. Net government debt is set to hurtle toward $1 trillion over the next four years, or 44 per cent of national output, numbers that are common place in many developed countries, but will feel like acid rain Down Under.
Australians became hyper-fearful of high government and foreign debt in the 1980s, when the liberalisation of the banking sector, the lowering of import tariffs, and the floating of the Australian dollar transformed the economy, but also exposed it more directly to the chill winds of global commerce.
Virtually any government since then that dared run their finances too loosely has been tossed out of power. Australians tend to reward politicians that covet low government debt, and forecast coming budget surpluses. The conservative mindset also extends down to state governments, which control a lot of public spending.
So while, Frydenberg has done exactly what’s needed to push back on the biggest economic shock since the since the Great Depression, it’s a strategy that is not entirely devoid of political risk.
At the RBA, which has control of the monetary policy levers, the new world of blockbuster budget deficits, will be viewed with a mix of euphoria and relief.
Euphoria, because the economy is in a deep hole. Output contracted by an eye watering 7 per cent in the second quarter alone, and without a flood of cash from Canberra over coming years, that hole will simply get larger, unemployment would rise, the mortgage market would shudder, and confidence in the country’s banks would rapidly be eroded. The sense of relief at the RBA stems from the fact the RBA wants Canberra to do the heavy lifting of the economy, given that its own firepower is running low. Interest rates have been cut to near zero, and the central bank is also buying 3-year government bonds to lower bank funding costs. Its term funding facility is helping to lubricate credit.
It wasn’t out of the realm of possibilities that Canberra could have asked the RBA to take on more of the burden. Some have even recently battered at the doors of the RBA demanding it print money in huge amounts to help the government out. But things just aren’t that dark … yet.
To Frydenberg’s credit, he has fully grasped the gravity of the economic crisis and will shoulder a huge amount of the load over coming years. There’s not been a peep from him about possible austerity measures. It’s a monumental, and timely change in the way things have been done.
The RBA still has some tricks up its sleeve. It can cut interest rates a smidgen more and deploy quantitative easing to lower borrowing costs. But it’s keeping these things in reserve for now, satisfied by the fiscal response. Negative interest rates are on the table, but are a distant option.
It’s Australia’s long history of conservative budgeting that means the heavy lifting of the economy can fall on governments now, both state and federal. A forecast net government debt burden of 44 per cent of GDP is still low by world standards.
The rainy day that Australians have been fearfully saving for has come, and it’s meant the old fiscal mantras no longer resonate.
-The Wall Street Journal
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