Repaying debt and growing economy a balancing act

At time when the International Monetary Fund is forecasting that a third of the global economy will be in recession this year, Anthony Albanese’s ­preference to repair the budget “over a period of time” by growing the economy rather than through big-ticket taxes is eminently sensible. His intention to honour his election promise to press ahead with the stage three $21bn-a-year personal income tax cuts that start in mid-2024 is vital. That will promote growth by helping combat bracket creep and rewarding hard effort and initiative. He must also resist penalising success by reverting to Shorten-era tax crackdowns on negative gearing, franking credits and superannuation.

New Treasury data, reported on Monday, showing the economy added more than 230,000 jobs between May and November, is encouraging. In maintaining momentum on job creation, Australia outperformed most developed economies in jobs growth, including the US, France, Germany and Japan. Boosting productivity, growth and therefore employment will produce a much needed fiscal dividend by increasing the revenue base and containing welfare. The Morrison government pursued a similar strategy as the nation emerged from Covid.

In the first part of his exclusive interview with Greg Brown on Saturday, the Prime Minister stopped short of committing to a path back to surplus in the May budget. That is a concern. At the start of the year, coinciding with the release of cabinet papers from 2002, John Howard and Peter Costello rightly urged the major parties to make deficit and debt reduction a major priority. It was essential, as they pointed out, to avoid Australia remaining vulnerable to another global economic shock or pandemic.

The October budget revealed a $42bn improvement to the bottom line over four years due to booming commodity prices and cuts to one-off spending measures such as Coalition grant programs and infrastructure projects. High commodity prices could push the budget close to or into surplus for the 2022 calendar year. But more importantly, the government needs to tackle the structural budget deficit exacerbated by growing recurring costs in the key areas of spending including defence, the National Disability Insurance Scheme, aged care and health. Interest payments on national debt are currently the fastest-growing area of government expenditure and therefore a good reason to retire debt as soon as practical, without choking off activity. The challenge requires an expert balancing act. Spending and business activity could be dampened in coming months with the RBA likely to further increase interest rates in response to last week’s inflation figure. The Australian Bureau of Statistics reported that the monthly consumer price index rose 7.3 per cent in the year to November. Contributors to the CPI rise were housing, food and transport – which all increased by more than 9 per cent. Reducing inflation to the target range of 2 to 3 per cent will be the RBA’S major challenge over coming months. It will also be a challenge for the government, Commonwealth Bank head of Australian economics Gareth Aird points out on Monday. While demand for labour remained strong it would slow during the year as the economy slows, he said.

As the Albanese government sets about pruning spending, its options will be limited by the demands of the national interest, the need to meet election promises and political reality. In the second part of his interview, published on Monday, Mr Albanese affirms the importance of the AUKUS pact and defence. As he says, it is a good agreement, not just for Australia, but for the US and the UK. In this quarter, the government will choose a preferred nuclear submarine partner under AUKUS and ­release the review into military capabilities by former defence minister Stephen Smith and former ADF chief Angus Houston.

While national security, the voice and energy policy will be prominent issues in the national debate this year, Mr Albanese, rightly, says the economy will be the biggest issue of the year. That includes meeting the challenges that have emerged in the global economy as a result of the Russian invasion of Ukraine, including dealing with rising energy prices. “Our priority is going for growth … the budget will be about the creation of wealth, not just its distribution,’’ he said. Such an approach has greater potential for success than redistribution.

Mr Albanese also talked about using the upcoming budget to invest in ­programs aimed at creating jobs. Rather than direct government intervention, the more prudent approach would be unleashing the power of aspiration by creating the climate for business to do the heavy lifting and increase investment and productivity. The government’s job is to get the economic settings right. In the emerging economic climate, increasingly rigid workplace relations rules will not help.