Frydenberg calls forth the ‘power of aspiration’

As expected, the budget presents the nation with an ugly set of numbers — the deficit to reach $213.7bn and net debt increasing to $703bn or 36 per cent of gross domestic product this year. Josh Frydenberg, a “glass half full” character, softened the blow, however, forecasting the deficit would fall to $66.9bn by 2023-24. That is ambitious and obviously precludes another big wave of coronavirus wreaking havoc. It clearly presupposes a successful vaccine, borders reopening and no major lockdowns. These could be heroic assumptions. Even without catastrophe, the budget still will be in deficit in 2031. Grim as it sounds, the forecast of net debt peaking at $966bn or 44 per cent of GDP in June 2024 also could be optimistic. That peak, as a share of the economy, would be just half Britain’s current debt, about a third of that in the US and about a quarter of that in Japan. Australia’s solid economic fundamentals at the start of the crisis will help stand us in good stead. Low borrowing costs will work in the nation’s favour. So much so that interest paid on debt will be lower per year for the next four years than it was in 2018-19.

It is a budget with an enormous government footprint, with outlays of public money that are staggering compared with those of other years. Spending will climb by 22.6 per cent compared with last financial year, with the deficit coming in at 11 per cent of GDP. This compares with 4.3 per cent last year and 4.2 per cent post global financial crisis in 2009-10. This is not the year for preaching fiscal prudence, however. The quality of the spend is all important. And Scott Morrison, the Treasurer and Finance Minister Mathias Cormann have thought out their strategy clearly. Far from crowding the economy with a larger public sector, they are getting out of the way of the private sector, leaving it to businesses, workers and consumers to rescue us through the real economy. This beats gratuitous handouts and government-sponsored make-work schemes.

More important than the raw numbers, dramatic as they are, the budget sets out a clear, two-pronged strategy to dig us out of the mire. First, it reaches out to Australians, including many of the most vulnerable, to cushion the fallout of the pandemic with a mix of handouts and a couple of worthwhile reforms. Second, it creates the conditions and incentives for private enterprise to lead recovery. The plan, commendably, does not involve increasing taxes. To the contrary, it brings forward lower, flatter personal tax rates, which The Australian has advocated for more than a decade. By 2024-25, 95 per cent of taxpayers will face a marginal tax rate of no more than 30c in the dollar. This year, more than seven million taxpayers will receive tax relief of $2000 or more.

Workers’ retirement nest eggs will be boosted by another long overdue reform. New superannuation accounts will no longer be created automatically every time a worker changes jobs. And poor performing funds will be required to notify members of their underperformance. The changes will matter to workers’ hip pockets. Super policyholders are paying $450m a year in unnecessary fees as a result of six million multiple accounts. And the $30bn super fees being paid every year exceeds the cost of household gas and electricity bills combined. The online comparison tool “YourSuper”, setting out funds’ returns and fees at a glance, undoubtedly will be as popular and well-used as the My School website. Funds will whinge, but it is a win for consumers and transparency.

The overarching theme of the budget, however, is its practical approach to bolstering business confidence and jobs. The JobMaker hiring credit, payable for up to 12 months to employers who hire JobSeeker recipients aged 16 to 35, is a prudent subsidy, designed to encourage firms to hire new staff for at least 20 hours a week. If Treasury estimates are accurate, it will help wean around 450,000 young people off welfare and into the productive economy. The generous investment incentives, to apply until June 2022, are appropriate for the times.

The government will allow 99 per cent of small, medium and larger businesses, with turnovers of up to $5bn, to write off the full value of any eligible business asset purchased. The goals are clear: to unlock investment, expand productive capacity, boost the order books of supply companies and assist the businesses that will buy, sell, deliver, install and service the new purchases. The measure is well targeted. Even pre-COVID, private sector investment was sluggish, acting as a brake on productivity growth.

The JobMaker and asset write-off initiatives will complement the government’s manufacturing strategy. Rather than a resort to old-fashioned protectionism and picking winners, that strategy is about levering Australia’s comparative advantages, including abundant, affordable energy, to strengthen our economic performance in well-chosen sectors. These include resources technology and critical minerals processing, food and beverage manufacturing, medical products, clean energy and recycling, and the space industry.

The education initiatives also are geared to boosting the productive economy, including an additional $1.2bn to create 100,000 new apprenticeships and traineeships, with a 50 per cent wage subsidy for businesses that employ them. Funding for 50,000 new higher education short courses in agriculture, health, information technology, science and teaching also are geared to areas of need. Helping more disadvantaged Indigenous students to complete Year 12, to go on to further education or to find jobs is always worthwhile.

If there is a tendency in the budget to distort markets it lies in the property subsidies, especially the First Home Loan Deposit Scheme. The measures announced at least have a worthwhile social objective in an era when housing remains prohibitively expensive to many, despite the COVID crisis. An additional $1bn of low-cost finance will support the building of affordable housing. And $150m injected into the Indigenous Home Ownership Program to construct new homes in regional areas will go some way to alleviating a pressing need in remote areas.

Given the bleak economic situation confronting Australia, and most of the world, Mr Frydenberg had a free pass this year to spend. By and large he has not wasted it. The welfare lobby might have wanted fortnightly pensions lifted and a commitment to boost the JobSeeker payment to a specific figure. The latter can be addressed after the current coronavirus supplement payments expire. And aged pensioners will receive an additional $250 payment from December and a further $250 payment from March next year. Given the strong preference of most older Australians to remain in their own homes for as long as possible, the increase of 23,000 home care packages, at a cost of $1.6bn will be welcome support. It brings the total number of places to 180,000, a figure likely to increase as the population ages in coming decades. But for now, at least, 99 per cent of applicants seeking an in-home aged-care package have access to some form of in-home support. That is something the nation can be proud about. The ageing of the population, unfortunately, will become a more difficult challenge judging by the budget papers. They project the population growth will slow to its lowest rate in more than a century — falling from 1.2 per cent in 2019-20 to just 0.2 per cent this year. This is mainly due to the fall in net migration. Long term, this poses a concern for growth.

Amid the projections of crippling debt and deficits, the economy is forecast to shrink by 3.75 per cent this calendar year and unemployment to peak at 8 per cent in the December quarter.

Under the government’s strategy to create the conditions for private sector growth, however, the economy is forecast to grow by 4.25 per cent next year, and unemployment to fall to 6.5 per cent by the June quarter in 2022. Once it falls comfortably below 6 per cent and recovery has taken hold, Mr Frydenberg foreshadows a change of strategy. That will involve shifting from providing temporary and targeted support to stabilising net debt as a share of the economy. As he says: “We will then rebuild our fiscal buffers so that we can be prepared for the next economic shock.’’ While the sea of red ink is unlike anything in Australians’ memories, the budget is true to liberal economic values. Despite gargantuan debt, the budget, in extraordinary circumstances, is essentially about personal responsibility, reward for effort and the power of aspiration.