Economy is fixing the budget but fiscal pain will come

Josh Frydenberg having pre-budget coffee with Peter Costello in Hawthorn on a Sunday morning. Picture: Nicki Connolly

The planets are lining up for Josh Frydenberg’s third budget.

We are far, far away from being in the black or a black hole; we’re deep in the red, but back from the dead.

The economy is roaring back to life and Treasury is filling its boots, with more revenue from taxes on companies and workers, and less spending on last year’s rescue mission.

Deloitte Access Economics partner Chris Richardson estimates deficits in the four years to 2023-24 are $98bn less than Treasury calculated in December. Officials in Canberra are not the only ones surprised by the broadbased revival or the staggering spurt in iron ore prices.

Wages are stagnant but the world is giving us another spectacular pay rise, yet one we can’t rely on long-term.

Of course, borrowing money now to pay for services and bureaucracy is dirt cheap, and is likely to be so for years. The interest bill on the humungous debt we’re accumulating is actually lower by $300m in four years’ time than it was when Frydenberg became Treasurer in 2018. As the economy grows the debt to gross domestic product ratio will fall.

But the budget will need a proper fix. There’s no vaccine to prevent fiscal damage, and eventually the capital’s politicians will be asked some very difficult questions.

Deloitte’s analysis shows we may need to save the equivalent of $40bn a year to get the budget back into balance.

“Australians do need to realise that there’s an eventual bill to pay — it isn’t nearly as large as many seem to fear, but nor is it nothing,” Richardson says.

“And the politics here are horrendous. If you’d like a yardstick, the last budget that tried to save a similar share of national income was in 2014, and it is widely seen as having torpedoed the fortunes of Tony Abbott and Joe Hockey”.

Abbott and Hockey are the crash-test dummies of fiscal overreach and sub-optimal salesmanship.

But that sort of crazy-brave — ending entitlements, introducing health co-payments — was needed to fortify a rickety budget that could not cope with ageing, poor productivity growth, and the looming social superstructure bequeathed by Labor.

Having campaigned on ending the Rudd-Gillard deficits and debt they had to act, but couldn’t bring it home in the parliament or to the public.

In his speech on the revamped budget strategy, Frydenberg threw fiscal hawks a bone.

He rekindled the principle “to target a budget balance, on average, over the course of the economic cycle, that is consistent with the debt objective”.

It sounded heartfelt when Mathias Cormann was finance maestro, but that chapter has closed, and the switch won’t be painless.

What hasn’t changed for two decades is that we have to do much better than muddling through on the supply-side of the economy. Next week’s budget will fiddle here and there on skills, red tape, investment tax breaks and public works.

But the political headspace for changing the way we work, use our precious capital, and turn ideas into profits, jobs and higher living standards, is not big or bold enough.

There’s no buffer for a planetary misalignment, let alone another meteorite strike.