Josh Frydenberg is planning for light at the end of the tunnel

The public blames COVID-19, not the government, for economic crisis, but this week’s revelation could spark a backlash.

Treasurer Josh Frydenberg at Parliament House in Canberra. Picture: Sean Davey

As Treasurer, Josh Frydenberg faces a once-in-a-hundred-year dilemma — he is hostage to a pandemic. His problem is Australia’s problem — the government wants to push the economy towards recovery but the nation, due to Victoria, has just recorded its worst-ever COVID-19 infection rate.

This week’s policies and unprecedented debt and deficit forecasts announced by Frydenberg are actually optimistic but their validity depends upon Australia continuing to perform better, to quote Frydenberg, “than almost any other nation in the world”.

The public is apprehensive, alarmed but resilient. This is understandable. The coronavirus is an assault on medical, psychological and economic confidence. “People want hope, people need hope,” Frydenberg tells Inquirer. “The economic recovery is a confidence game, it’s so important we maintain the public’s confidence.”

That is a daunting challenge with Australia facing a more arduous era of high unemployment, generational long debt and deficits, damaged industries and shrinking opportunities for many people. The headline unemployment rate is forecast to rise to 9.25 per cent before Christmas but this rests on optimistic assumptions: that the Victorian lockdown works, the Victorian border reopens as planned, that COVID-19 is contained across the nation and that recovery is ignited.

Scott Morrison and Frydenberg inject confidence into this equation by saying the “effective” unemployment rate is what matters (given many people working zero hours were classified as employed people due to the JobKeeper scheme) and this rate, near 15 per cent in April, down to 11.3 per cent in June, is predicted to fall further by December.

“Two World Wars and a Depression didn’t bring Australia to its knees,” Frydenberg told the Press Club yesterday. “And COVID will not either. Decent, hardworking Australians from all walks of life, through no fault of their own, are paying a heavy price. It’s not right, it’s not fair, but it is our harsh reality.”

To this point the public blames the pandemic, not the government, for the economic crisis. But this week sees a crucial transition in Australia’s response: it moves from the emergency phase to, in Frydenberg’s words, the “managing recovery phase”. This is far tougher, with the onus of responsibility sure to shift.

The opening test will come with the Omnibus Bill to extend at sharply reduced level the JobKeeper support now sustaining 3.5 million people but falling to 1.4 million in the December quarter and 1 million in the March 2021 quarter — but including in the bill an extension of the temporary job-creating provisions that enable employers to change employee duties, hours and locations.

Critically, this would apply not just to the smaller number of firms getting JobKeeper support from October to March but all 960,000 firms on the scheme at present. Frydenberg called this “the first cab off the rank”. It will be furiously opposed by the ACTU, and Labor has signalled its criticism.

This means the JobKeeper extension becomes a test of whether co-operation across the chamber is retained or dissolves in a “politics as usual” reversion. Frydenberg delivered a firm warning: the temporary changes have proved that IR flexibility creates jobs. He said this is the test that matters. All parties must ask themselves: “Will the changes they seek create more jobs or less?”

The emergency phase over the past several months has been without precedent in our history — the government has committed about $164bn to save jobs and businesses, about 8.3 per cent of GDP, taking the budget from near surplus to a forecast massive deficit of $184.5bn or a staggering 9.7 per cent of GDP in 2020-21.

Australia will be a deficit nation for decades, beyond the current generation and carrying over to its children. Yet these spending and support decisions were justified. The quality of health and economic leadership, Victoria aside, has been high to this point as shown in this week’s Newspoll with the Morrison government heading Labor 53-47 on the two-party-preferred vote and Morrison’s satisfaction rating a high 68 per cent to Anthony Albanese’s 27 per cent.

Yet Frydenberg admits the potential black hole in the economic transition the government seeks. That’s because, right now, Australia is split, stranded “at two different stages”, with 5 million Victorians in lockdown while “six out of our eight states and territories have almost no cases and no community transmission”. Four weeks ago, on June 23, Victoria recorded 20 new cases of COVID-19 but on Thursday it had 20 times that number.

Morrison and Frydenberg won’t be shifting from Australia’s suppression strategy, with the Treasurer warning that “a strict elimination strategy would cripple our economy”. He quoted Treasury calculations to the effect that “a six-week Australia-wide hard lockdown could reduce GDP by around $50bn”. With Victoria on the edge, the stakes for the national economy, and the Morrison and Andrews governments, are immense.

The Treasury forecasts released by Frydenberg are distinctly optimistic. They contrast with the ethos of Parliament House, with Frydenberg saying: “In Canberra I am subject to restrictions. I can’t leave the building and when I move about the building I wear a mask. I can’t go to the PM’s office to talk to him, so we talk on video conference.”

The forecasts show real GDP falling by 3.75 per cent in 2020 before kicking back to increase by 2.25 per cent in 2021. Beyond the virus, however, there are two critical questions — uncertainty about the government’s medium-term reform agenda for growth and the extent to which the national cabinet method of consensus-building will dictate Morrison-Frydenberg policy in the recovery phase.

The government’s political success has been driven by across-the-table collaboration. Frydenberg invokes the “strong spirit” of co-operation as critical to future progress. His message is the Australian people “have come together” and that strength in unity is the way forward, “from business to the unions and the banks”.

That’s true. But competing interests are not eliminated. The issue is whether our institutions are mature enough to compromise in sorting policy to meet the enduring crisis. All roads now point to the October budget.

There are three certainties — the bringing forward of some of the already legislated personal income tax cuts that Morrison and Frydenberg took to the 2019 election; tax incentives to stimulate business investment, with Business Council of Australia chief executive, Jennifer Westacott, warning such investment, vital for jobs, is in “free fall”; and more financial support to sustain individuals and the economy.

It can be assumed that JobKeeper will be extended again beyond March 2021 and that the elevated unemployment benefit, the JobSeeker supplement, while reduced by $300 in this week’s announcement, will be continued at a higher rate than pre-COVID. Morrison has made that clear.

So the budget will see a further significant increase in the 2020-21 deficit far beyond $200bn. It remains true that deficits and debt, while a constraint on policy, are not driving policy. The magnitude of the nation’s social and economic crisis is revealed in the forecast of official unemployment at 8.75 per cent in mid-2021, a year from now.

Have no doubt, the next election will be a high-unemployment election; the battleground being economic policy to create jobs. Those most affected are women, youths, casuals and part-timers. Frydenberg said the falls in GDP and jobs “are around twice as big” as occurred in the GFC a decade ago. Young people entering the labour market will earn 8 per cent less in their first year of work. The virus “has cost us 3½ years’ worth of accumulated GDP growth and around three years of hard-won employment growth”. The social cost will mark the country for many years. And the real impact is yet to be felt.

You can assume the ongoing attitude of Morrison and Frydenberg will be: those who need support will keep getting it. But the risk is the real unemployment numbers will be higher for longer and genuine recovery a far longer travail.

The nightmare that haunts Australia is a repeat of the 1990s recession story, with the Treasury explaining that a generation ago it took seven years to drive unemployment from its 11.2 per cent early-90s peak to below 7 per cent. Put another way, it took nearly 15 years after that recession to return unemployment to 5 per cent. The moral: recovery post-recession is a tough journey.

Gross debt is expected to reach $851.9bn or 45 per cent of GDP by June 2021 and net debt increase to $677.1bn or 36 per cent of GDP. “Even at these levels our net debt-to-GDP ratio is significantly below that of comparable countries,” Frydenberg said. “The average net debt-to-GDP ratio of many advanced economies is expected to exceed 100 per cent in 2020.”

If the Treasurer looks panicked, the cause is lost. Frydenberg’s skill is to project calm amid crisis. “Last Wednesday, sitting alone in my office looking at the numbers, it really hit me,” he said. “It’s the impact this is having on the country and the importance of keeping up people’s hope and confidence.”

Revelation of the debt and deficit numbers — and the recognition they will only get worse — risks a backlash against the government on the basis it has spent too much. Finance Minister Mathias Cormann confronted this, asking: “What was the alternative?” His point: the deficit matters but the unemployment numbers matter more. The government’s fiscal support so far has saved an estimated 700,000 jobs and prevented unemployment from being five percentage points worse.

Frydenberg was emphatic: the government will shun any austerity strategy. He says the immediate and medium-term priorities are financial support, reigniting economic growth, infrastructure and skills, the legislated tax reforms, sorting further tax reform with state treasurers, tackling red tape, a more flexible industrial system, streamlining environmental approvals and enhancing the digitisation of the economy. “If we can partner with the unions and business, that’s a good thing,” he said.

This is a different era from the 1980s. Earlier talk about a Hawke-Keating-type economic reform agenda was a mistake. It created a misleading impression and a policy test this government will not meet. Morrison and Frydenberg want to keep public confidence and, as far as possible, avoid having their agenda derailed by old debates about mega-reforms such as increasing the GST that merely guarantee a destructive brawl.

The Treasurer identified two huge structural markers in the current crisis. First, with the cash rate at 0.25 per cent Reserve Bank interest rate cuts are unavailable in the current crisis. Highlighting this, Frydenberg said the bank’s 4.25-percentage-point rate cuts during the GFC a decade ago would be the equivalent of $100bn in fiscal support over a 12-month period, a deeply sobering point.

Second, unlike in the GFC, the worldwide pandemic has closed international borders, shut down immigration and slashed Australia’s 2020-21 population growth rate projection to 0.6 per cent, the lowest in this country since 1916-17, another deeply sobering point.

The logic, as Frydenberg says, is with monetary policy ineffective and migration at an unprecedented low, the onus falls on the government to provide fiscal support to deliver “the most dynamic and flexible economy we possibly can”.

The destiny of this period of Coalition government has been rewritten: it has become the management of profound adversity in the dual medical and economic crises. The sheer difficulty of forecasting in this situation and the risks Australia faces were highlighted this week in the Treasury’s comment: “Sensitivity analysis suggests that the measured unemployment rate could be between 7 per cent and 10.75 per cent by the December quarter” depending upon how hours are split between existing and new workers and what happens to the participation rate.

Frydenberg said the global economy has contracted only once in the past 40 years and that was a marginal 0.1 per cent contraction in 2009 during the GFC; it is predicted to shrink by 6 per cent this year. Obviously, there is no comparison.

Victoria’s second wave will take $3.3bn off GDP in the September quarter. All the government’s numbers assume Victoria’s border closures remain only to August 19 and that international travel will resume but remain at low levels until June 2021. If NSW and Victoria succumb to the second wave the consequences will be dire. For example, Treasury said the economic damage from the nationwide March-May restrictions cost GDP $4bn each week during this period.

Asked how long Australia might need to endure the crisis, Frydenberg said it depended on two factors — Australia and the world. The first was “how effective we are in managing new cases” because “that will determine the speed and trajectory of our economic recovery”. The second was the global situation; managing the second wave now hitting many countries, and the prospect for a vaccine.

What does he do for relief from the crisis? “I have two ways to free my mind. I walk each day, some days I do 11km, others days four or five kilometres, always first thing in the morning. The other outlet is watching sport, watching the footy, it’s important to me.” Frydenberg is a Carlton supporter and No 1 ticket holder for the Melbourne Storm. He likes to kick goals as well as score tries.