Josh Frydenberg reaches a personal milestone this week when he overtakes Scott Morrison and Joe Hockey to become the longest serving Liberal treasurer since Peter Costello. It is an achievement worth noting, but what really matters is what he has done in the job rather than how long he has held it.
Few treasurers have had stewardship of economic policy in more difficult times. Costello had the Asian financial crisis and the dotcom bubble. Wayne Swan had the global financial crisis. Paul Keating had the balance of payments crisis that led to his warnings about Australia becoming a “banana republic”.
In an interview for this column, Frydenberg acknowledges the “extremely challenging circumstances” he has faced as Treasurer in crafting an economic response to the Covid-19 pandemic. But he recognises that his predecessors also had to confront difficult challenges, whether in peacetime or wartime.
Frydenberg is an inherent optimist who trumpets the fundamental strength and resilience of the Australian economy. The economy bounced back strongly after the recession last year. But the impact of lockdowns and stay-at-home orders may see Australia plunge into another recession this year, if the September and December quarters see negative growth.
“Given the lockdowns across our two biggest state economies, NSW and Victoria, it won’t be surprising if the September quarter is negative,” Frydenberg says.
“As for the December quarter, it’s too early to tell. We have seen the economy rebound strongly from prior lockdowns and have good reason to expect that it will do so again. But Covid has taught us we never know what’s around the corner.”
This is a significant statement. The Treasurer has conceded that the December quarter may see growth contract. Two successive quarters of negative growth meets the technical definition of a recession.
While Frydenberg is confident the economy will rebound strongly, he also recognises that Covid makes it impossible to be entirely confident.
It is a subtle difference in language from last week, when Frydenberg suggested Australia would likely avoid another recession. Now he is not so sure. After all, the Treasury estimates the lockdowns in Sydney and Melbourne are costing the economy about $300m a day. NSW Premier Gladys Berejiklian said on Monday that she did not know when Sydney’s lockdown would end.
The economy remains hostage to the vaccine rollout. There is no doubt that the procurement of vaccines and their distribution have been too slow. Mixed messaging by health experts and government has contributed to vaccine hesitancy.
But the rate of vaccinations is inexorably linked to the economy. Businesses, jobs and living standards depend on it.
“Vaccination is Australia and the world’s ticket out of this crisis,” Frydenberg says. “The Australian economy has shown remarkable resilience during the pandemic, having seen unemployment fall to 4.9 per cent – the lowest in a decade. This demonstrates that when we successfully suppress the virus, the economy bounces back. The only pathway to a sustained recovery is through vaccination.”
In his almost three years as Treasurer, Frydenberg has delivered three budgets. It is not surprising that given the unpredictable economic forecasts and the demand for further economic assistance – the Morrison government has spent more than $150bn in direct economic support payments – he does not rule out delivering an early budget before May next year, when the next election is due.
Where Frydenberg departs from Costello is in delivering a big-spending, high-debt, large government budget and delaying fiscal consolidation. He argues that there are no “ideological constraints” during times of national crisis. Fair enough. But the increase in spending is eye-watering. The size of spending is estimated to have increased from 27.7 per cent of GDP in 2019-20 to 34.8 per cent in 2020-21. He acknowledges there is a “major fiscal repair task” to come.
“The Coalition’s responsible fiscal management, which saw the first balanced budget in more than a decade, put us in a position to respond as required during Covid,” Frydenberg argues. “Our economic support measures, which have been targeted and temporary, have been designed to avoid a generation of long-term unemployed and labour market scarring which was the legacy of previous Australian recessions. This has been achieved to date with Australia ahead of any advanced economy now having more people in work than before the pandemic began.”
But the truth is that the budget bottom line, along with employment and growth, depends on containing the virus. A few months ago, the economy was booming with unemployment falling, the stockmarket roaring, house prices surging and the dollar climbing. Now the outlook is less rosy. New virus strains could mean that we see further peaks and troughs in coming years. Frydenberg’s mission, as he sees it, is to support economic growth and smooth out the recovery.
The Intergenerational Report shows that fiscal repair will not get easier, as over the next 40 years the budget is expected to remain in deficit as the population ages, growth slows and productivity is lower.
Frydenberg insists the government is focused on economic reform, and he points to lower personal and company tax rates, changes to superannuation, new insolvency and foreign investment laws, and the digital platforms bargaining code.
He has shown a command of detail and a capacity for communication better than any other Treasurer since Costello. He also has earned authority and respect as deputy Liberal leader.
Ultimately, he will be judged on the ongoing response to the pandemic and whether he has the courage to pursue further reforms to turbocharge productivity that will underpin higher living standards across the long term as Costello and Keating did when they were treasurer.
As Frydenberg climbs the ladder of longevity for Liberal treasurers, he will need another year before he surpasses Billy McMahon, while John Howard and Harold Holt will take even more years to overtake. Costello is, surely, out of reach. But, as we all know, Frydenberg is eyeing another league table that he hopes to join one day.
For now, though, Frydenberg is not focused on chalking up days in office. These are indeed testing times, and the government’s economic response to the pandemic has been well-judged overall. But Frydenberg’s biggest test may be yet to come, as Australia stands on a precipice with a resurgent virus and an economy on the brink of another recession.
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