Budget repair under way as deficits shrink in larger pie

Recovering from the financial ravages of the pandemic will result in plenty of red ink in budgets for years ahead. But as the budget handed down on Tuesday showed, Josh Frydenberg’s competent, systematic approach to tackling debt and deficits is beginning to bear fruit. Now that the national economy is back on its feet, the Morrison government has moved from the crisis phase of providing emergency support to save jobs and allow families to withstand the widespread loss of incomes forced on them during lockdowns. As the budget papers say, the government has moved into the medium-term phase of its fiscal and economic strategy: “Priority is now being placed on growing the economy to reduce debt and rebuild fiscal buffers.”

Booming coal and iron ore export earnings have boosted company tax revenue, the Treasurer told the National Press Club on Wednesday. Higher GST receipts and an $11bn saving in welfare payments as unemployment falls and more JobSeeker and youth allowance recipients become taxpayers also is helping. Without resorting to austerity, an appropriate measure of fiscal discipline is coming into play. That reality is far from the claims being pushed in some quarters, in which commentators hostile to the government are wringing their hands about how international interest rate rises will affect the costs of servicing government debt. Taking the full picture into account, however, a Hanrahan-like “We’ll all be rooned” approach is misleading and counter-productive.

The budget for 2022-23 shows the government is planning to bank the bulk of the windfall improved bottom line, triggered by further blockbuster employment gains and record terms of trade. Of the $114.6bn revenue improvement across the forward estimates, it plans to spend just $30.4bn, or 27 per cent, based on decisions made since the mid-year outlook in December last year. As political circumstances change, it may end up spending more. On the other hand, as Mr Frydenberg says, the anticipated revenue gains are notably conservative. Iron ore, currently fetching $US134 a tonne, is priced in at $US55 a tonne from the end of the September quarter. The metallurgical coal price is assumed to decline from $US512 to $US130 a tonne and thermal coal from $US320 to $US60 a tonne. As Deloitte’s Chris Richardson says, for every week that coal and iron ore prices stay sky-high, the government receives an extra $1bn revenue. The savings have already started. Of $121.8bn in windfall revenue gains between the 2020-21 and the 2021-22 budgets brought about by faster than expected recovery, the government spent 72 per cent and managed to save 28 per cent. But more of the windfall budget gains are now going to the bottom line.

Wild cash splashes to buy votes would be irresponsible. Knowing when to turn off the spending tap is a key responsibility of government. But neither is there a convincing case to accelerate savings to retire debt as fast as possible. Credit agency Standard & Poor’s warned against that approach last week. Aggressive budget repair would put Australia’s coveted AAA debt rating at risk and come with “long-term consequences for the economy”, the agency’s lead country analyst Anthony Walker said. Barrenjoey chief economist Jo Masters makes an important point in the news pages on Thursday when she advocates productivity-enhancing reform to grow the economy without hitting capacity constraints. “That’s even more important in a world of rising interest rates,” she said.

The budget papers show the federal deficit for 2022-23 is expected to be $78bn, or 3.4 per cent of gross domestic product. In the next three years the deficit is forecast to more than halve to 1.6 per cent. As Mr Frydenberg says: “By growing the pie, we can, as we showed last (Tuesday) night, reduce our deficits over time, steadily.” The government’s focus to close the gap between revenue and expenditure will be “about growing that pie”.