Best way to attack debt and deficits is to go for growth

Josh Frydenberg and Finance Minister Mathias Cormann are sitting on an ugly set of numbers. Thursday’s economic statement will reveal the deepest fiscal hole since World War II. Last year’s budget forecast of a “back in the black” surplus has been obliterated; this year’s deficit could end up twice as large, or around 10 per cent of gross domestic product. It’s a rolling financial catastrophe, as emergency spending and a huge drop in revenue conspire to open up a vast sea of red.

The Morrison government has pencilled in — no one would be so silly to plot anything in ink — stimulus of $289bn across two years. The bulk of it is direct fiscal action, with $164bn going in wage subsidies, welfare payments and cash injections. The remainder is for loan guarantees to provide companies with balance sheet support.

The government argues this splurge will have prevented the loss of 700,000 jobs, lowering the unemployment peak by five percentage points. Reserve Bank governor Philip Lowe, with little left in the monetary policy arsenal, endorsed the first phase of JobKeeper and JobSeeker payments, ahead of the government’s $20bn tinkering. On Tuesday, Dr Lowe said direct transfers to households and businesses, and increased spending on infrastructure and public health, were “manageable and affordable”, given solid public finances and low interest rates. This is what governments do — they use their balance sheets to smooth out shocks to private incomes. It’s why we endorse budget repair, to achieve fiscal balance over the course of the business cycle. So when trouble comes — like a financial crisis, slump in commodity prices or a pandemic — governments have a fiscal buffer. In the present, to do “whatever it takes” to save lives and livelihoods and to “build a bridge” to recovery, as the central bank chief is wont to say.

At some point, Dr Lowe said, there needs to be a fiscal consolidation and a reduction in public debt relative to national output. Why? Can’t Dr Lowe just keep printing money and drop it from the RBA’s helicopter into the hungry mouths of employers and workers, as the fad prophets advise? No. “The tab always has to be paid and it is paid out of taxes and government revenues in one form or another,” he said. When the time comes to address the debt mountain — and that day has not yet come into view, except for a Labor outfit striking a pose — the best way to do so is through economic growth. The relapse in Victoria, which recorded a new daily high of 484 cases of COVID-19, will be a drag on growth in the September quarter. The six-week lockdown is affecting confidence well beyond the southern state’s borders. Stop-go-stop-go is no way to run an economy or society, whether trying to reopen a Melbourne restaurant, as John Lethlean reported on Wednesday, or running a school, tourism business or sporting competition. Such uncertainty immediately hits consumer spending and, more worryingly for the future, leads to shelving of investment plans.

The budget update is likely to show a drop of 6 per cent in private investment last financial year, followed by a plunge of 12 per cent in the current one. The capital slump points to a less dynamic economy and lower rates of growth in the recovery; workers will be less productive because they will be using outdated tools, software and machines.

Australia has solid fundamentals, as the RBA chief tirelessly observes, while trying to pump up our tyres as growth engines sit in idle. Scott Morrison has put bold growth targets in lights. He declared we should aim to expand the economy at an above-trend rate of around 3.75 per cent a year for the next five years. That’s a lot of aspiration for an old engine, one that hasn’t had a proper rebuild in two decades. Rather than outlining a road map to achieving this goal, the mini-budget is a mere pit stop on the way to the Treasurer’s fiscal extravaganza, which has been pushed back to October 6. His second budget is expected to fast-track personal income tax cuts, while business will benefit via an investment allowance. While the big decisions have not yet been taken, the Morrison government has groups working in parallel on a recovery strategy, including on manufacturing, industrial relations reform and energy.

Of course, success in suppressing the rate of coronavirus infections is the key assumption for revival. Mr Morrison also has emphasised the importance of workplace flexibility to job creation; the crisis settings by businesses for rosters, job sharing, working from home and pay rates will run for some time, probably into next year. As the Prime Minister indicated on Tuesday, whether or not the government strikes a deal with the ACTU in current talks, he will push on with his desired industrial reforms in the parliament.

On several occasions since March, we have urged Mr Morrison not to waste this crisis. To control and reduce what Mr Frydenberg described as an “eye-watering” deficit, not burden the next generation, restore the lost jobs and lift our standard of living, we need an ambitious game plan. Practical measures such as reducing regulation, cutting energy costs, improving the tax incentives to invest and innovate, and having flexible work rules will help us achieve the growth rates we need.