Budget 2020: PM banks on a new Liberal order

By capturing the middle ground, the Prime Minister and his Treasurer are limiting Labor’s scope and relevance.

Josh Frydenberg and Scott Morrison are ‘showing that expansionary policy is far more popular than tough-minded restraint to achieve a surplus’. Picture: Getty Images

The contradiction almost defies belief. With gross debt to peak at a huge $1.7 trillion, thereby ending the age of Liberal Party deficit-busting restraint, the Morrison government has found the centrist political position the party has craved since 2013.

Much can go wrong from here. But consider this remarkable Liberal Party transition. The 2014 Abbott government “end of entitlement” budget with its drive towards the prized surplus, harsh policy reforms and fatal political confrontation is a monumental contrast to the Morrison government’s COVID-induced Keynesian 2020 budget — a long journey without parallel in our economic history.

Tony Abbott governed in prosperity while Scott Morrison governs in crisis. Yet there are two truths — there has never been a better time to fight a recession, and crisis can empower leadership. The 2020 budget shows that battling the COVID recession remains good politics.

Josh Frydenberg’s omnibus budget tax bill passed the parliament on Friday without drama, offering an illuminating contrast to past squabbling over tax policy.

The budget will have a guaranteed impact. The huge deficits to generate jobs — estimated at a combined $480.5bn across four years — will put a ceiling on unemployment with optimistic Treasury forecasts that unemployment will peak at 8 per cent in the December quarter and growth reigniting next year. That jobless rate would be less than in the previous recession of the early 1990s when it tipped over 11 per cent.

But it is the strange nature of this recession that bequeaths its politics. Historic low interest rates mean huge deficits can be financed at bargain-basements costs — so massive Keynesian stimulus has never come so cheap. Beyond that, the recession is global and caused by combating a pandemic — as distinct from government economic blunders — with the public rewarding strong action against the virus and vast fiscal expansion.

Such expansion is transforming the atmospherics of politics. The Prime Minister and the Treasurer are showing that expansionary policy is far more popular than tough-minded restraint to achieve a surplus — just ask Abbott and Joe Hockey. Because we hadn’t seen this for a long time we nearly forgot about it.

Coming in the eighth year of the government, after three election wins, the crisis gives the Liberals fresh political meaning. They are less ideological, more practical, more anchored in the political centre, more united and ever ready to engage in the Menzian method of improvising with traditional Labor positions when the situation demands.

This budget is the culminating event of the new Liberal order under Morrison-Frydenberg concord and pragmatism. It is rewriting Liberal history. This strategy and partnership will pilot the Coalition to the next election. It will frustrate the left and anger classical liberals and populist conservatives. But the fiscal expansion draws on the trust now established between the government and Treasury under Steven Kennedy.

Anthony Albanese in his budget reply accepts the election issue will be jobs and recovery, and seeks a Labor recovery profile with many echoes of Kevin Rudd as he runs on education, childcare, renewables, manufacturing and a smart country that makes things.

His budget reply is significant for its direction — the Opposition Leader won’t campaign on any Bill Shorten fantasy of a big-spending agenda financed by big taxes. His focus will be jobs, productivity and recovery. The problem is the economy is Liberal political terrain — but Albanese has no real choice. “We have a reform agenda,” he said on Friday. “The current government has none.”

Albanese’s purpose is to devise a recovery agenda based on Labor values, pitching to people where Labor thinks Morrison is vulnerable — working women, the aged, people in care, workers over 35 not being subsidised, the jobless, manufacturing workers and students.

This points to a tactical, not a strategic, approach. Yet Labor seems locked into pitching to constituencies where past campaigns have usually failed to deliver office. Can Albanese win the economic credibility that Rudd attained in 2007? That is a daunting task. By holding the middle ground, Morrison is squeezing Labor’s scope and relevance. Nearly everything depends on whether the budget strategy works, but that answer may not come until post-election.

The government has ducked a pro-market productivity enhancing budget, as many commentators demand, for two reasons — recovery, not reform, is the immediate priority and such reforms would guarantee a damaging, partisan brawl when Morrison’s purpose, above all, is to project as a prime minister of national unity during the crisis.

The tax package is pitched to equity and impact — most benefits go to people earning less than $90,000 who are more likely to spend the gains. This is a signature decision by the Morrison government revealing of its character.

Contrary to expectations, it declined to bring forward the stage three tax cuts that assist higher-income earners, opting instead for fairness and political compromise — in effect delivering what Labor demanded — choosing the path of enlisting rather than fighting Labor.

This is Morrison pragmatism in action: make it hard for the Senate to say no. His approach is always get the job done, get policy legislated. This reverses the exhausting and damaging parliamentary encounters of the Abbott and Turnbull eras; witness the brawls extending into years over across-the-board corporate tax cuts, the Medicare surcharge, education, welfare and health cuts. These battles sapped the energy and hopes of the two previous governments.

Ideology is in retreat but it is never dead. While the crisis demanded Keynesian expansion the Morrison government has honoured the Liberal tradition with its method — the budget seeks to build recovery on tax cuts for individuals and tax incentives for companies. “Eight out of every 10 jobs in Australia are in the private sector,” Frydenberg said. “It needs a kickstart.”

The numbers tell the story. The biggest budget decision is $26.7bn to allow business to deduct at once the value of assets they purchase. The second biggest is $17.8bn in the income tax cuts backdated to July 1 for 11 million workers, with relief for a dual-income family up to $5490 compared with 2017-18. Apart from infrastructure funding that comes next, the fourth biggest decision is $4.8bn for temporary loss carry back measures for business.

The business lobbies, big and small, have responded with enthusiasm. They pledge to create the jobs. We shall see. Our economic history since the 1980s shows strong growth rebounds after recessions, as distinct from rapid job recoveries. The Morrison government has bet its future on that familiar racehorse, private enterprise. The question now is whether private enterprise backs the Morrison government. This is a pivotal point for the entire Liberal Party recession-fighting project.

The risks Australia faces remain stark. The government fights a pandemic that defies prediction. Many things can go wrong. Will the vaccine be developed and administered across the population by the end of 2021 as the budget assumes? Will employers respond to the large budget incentives? Will consumers spend with their tax cuts? Will self-interested, irresponsible, protectionist premiers sabotage recovery by refusing to open their borders and will the High Court give them immunity? Risks abound.

Frydenberg says the debt is a “price worth paying” and signals the government, depending on events, “will continue to take temporary and targeted measures”. This recognises the reality — more support might be needed. Frydenberg’s compact with the nation, as Treasurer, was unqualified in his budget speech. “The Morrison government’s message to Australians is that we have your back,” he said. This will remain the operative pledge to the next election.

The immediate task facing the budget is immense — with JobKeeper now supporting 3.5 million people across 900,000 business and to terminate next March, avoiding any labour market cliff is still risky despite new job-creating decisions in the budget worth $98bn. But the recovery is under way. About 760,000 people who lost their jobs this year are back working. The budget forecasts almost 950,000 new jobs will be created across the next four years. Morrison and Frydenberg, relying on Treasury, seek to learn from past recessions — hence the $4bn hiring credit to businesses paid at the rate of $200 a week for hiring unemployed people aged under 30 and at $100 a week hiring people aged between 30 and 35.

Treasury estimates this will create 450,000 jobs for young people. Doubts have arisen as to whether it will assist the young at the cost of jobs for those over 35. But Frydenberg said after the early 1990s recession it took 15 years for the employment rate for youth people to return to normal. “We are striving to do better,” was his message.

The scale of the 2020 fiscal expansion is justified. The Treasury estimates that without such support the official unemployment rate would be at 12 per cent for the next two years. The transaction at the heart of the strategy is that incurring massive debt now to be paid by future generations in order to deny a deeper recession for the current generation is a legitimate political and ethical choice. Morrison said 90 per cent of the spending occurs in the next two years — it will be temporary — but turning off the tap is never easy.

Both sides of politics accept the core principle of fiscal expansion. It is the new worldwide orthodoxy. In this sense the budget, while appearing radical, mirrors conventional economic norms. The task is to meet the emergency that exists. Albanese talks about the need for a recovery that is stronger, fairer and more inclusive — and this makes any philosophical and strategic attack by Labor on the budget far more difficult.

Morrison and Frydenberg are playing for high stakes. The numbers document that. Politics will turn if the Morrison government finds itself stranded — that is, if its massive deficits don’t deliver the goods. That would become a double disaster and provoke fierce attacks from both the left and right as well as severing internal unity.

The Liberals are set on an economic direction foreign to Abbott and Malcolm Turnbull, driven entirely by circumstances. Morrison and Frydenberg could have stumbled at any one of several points in the past six months. But they didn’t. The public, despite the brutal pain of recession, might yet reward this government more generously than the grudging rewards it offered Abbott or Turnbull.

Despite the numbers this budget radiates a sense of putting off hard decisions. The industrial relations reforms are yet to come but the necessity of winning parliamentary support will limit their scope. By choosing corporate support via tax concessions, the government defers the inevitable showdown it must face about cutting the corporate tax rate. By declining to bring forward stage three income tax cuts, it raises questions about the actual tax policy it takes to the next election.

Finally, by exempting companies with a turnover of more than $5bn from tax relief, it persists with different tax policies dependent on corporate size, a weak stance that proves it can be intimidated by its opponents. The longer one assesses the budget the more one is struck by the government’s reluctance to commit to serious structural reform that will be contested. This is not an encouraging omen. Albanese can detect the government’s flaw. His initiatives seek to exploit this with expanded childcare at a cost of $6bn and a goal of subsiding 90 per cent of childcare for all families along with a major rewiring of the electricity transmission network to help realise Australia as a renewable energy superpower.

The government faces ongoing multiple challenges. Wage growth will remain below average for the next two years. Population growth will fall to the lowest in a century. Net overseas migration will be negative by 72,000 in 2020-21 and negative by 22,000 the following year. Rebuilding net overseas migration will be essential to restoring the economic growth trajectory.

Overall, the size of the economy will shrink by about 5 per cent because of COVID-19. The debt story, dominating the outlook, is both assuring and alarming. Gross debt will peak at about 55 per cent of GDP in the medium term. Net debt forecasts have effectively doubled across the past year with net debt forecast to peak at 43.8 per cent of GDP in 2024.

On the bright side, Treasury said Australia’s debt “will remain low compared with most advanced economies”. The stunning feature of the budget is that while debt has risen dramatically the historic low level of interest rates means interest payments on debt lift only marginally.

The budget week finished in triumph for departing Finance Minister and Senate leader Mathias Cormann with the successful passage of the tax cut package just three days after the budget was brought down. “The parliament just made it real,” Morrison said. Meanwhile Morrison and Cormann took aim at Labor for making women a central theme of its budget critique, pointing out that female labour force participation had previously reached a record under the government.