MYEFO: Black is the new black on fiscal horizon

Treasurer Josh Frydenberg answers questions about the Mid-Year Economic and Fiscal Outlook at Parliament House in Canberra Picture: Gary Ramage

The $24bn improvement to the budget’s bottom over four years is welcome news for taxpayers amid the pandemic gloom and an inland red ocean of deficits and debt.

But the saving on borrowing is merely a rounding error when you realise Canberra’s spending is going to be $2.4 trillion over four years, or 100 times the clawback.

The deficit of $198bn this fin­ancial year still beats all-comers and is mainly due to mammoth spending of $671bn, about 35 per cent of gross domestic product.

Still, you’d rather be Josh Frydenberg than any custodian on planet rich, and the Treasurer seemed to wear his good luck with equanimity.

The combination of containing the coronavirus and fiscal stimulus, as well as reopening in Victoria, is paying off.

Since that sombre Tuesday 10 weeks ago when the Treasurer delivered his second budget, Treasury has revised up GDP growth, while unemployment is expected to fall to 6 per cent a year earlier than previously expected.

Private sector economists are racing to adjust their digital abacuses, with the Reserve Bank, taking a well-earned break over the summer from the forecasting caper, exposed as a gloomy laggard by comparison.

The reported November rebound in employment, hours and, most impressively, labour force participation to pre-pandemic highs points to a rapid decline next year in the jobless rate.

Commonwealth Bank economists expect unemployment to be down to 5.75 per cent this time next year off the back of a lift in employment of 2.7 per cent and slower growth in the working-age population.

On Thursday, Frydenberg highlighted one of the quirks of this downturn and its subsequent scatty revival. It took six years for the unemployment rate to recover to its pre-recession level in the 1980s and 10 years to do so in the 90s. This time, Treasury thinks the lost ground will be made up in four years. When the jobless rate is somewhere between 5 and 5.5 per cent, we’ll see a return to fiscal repair by the Morrison government, should it be in office.

The jobs market is recovering strongly, welfare payments are falling, and consumer spending is coming back, which is the ­Coalition’s marketing slogan to restore confidence.

More than a few things could go wrong. Treasury has tweaked its view on “trade tensions”. Households could continue to hoard tax cuts and income support payments, some of which have been extended until the end of March. There could be fresh outbreaks of COVID-19 at home and abroad. “The virus is not defeated,” Frydenberg said.

Iron ore and effective vaccines are “upside risks”, according to Canberra’s econocrats.

Yet there’s a persistent worry over prospects for our young ­people, the ones Scott Morrison worries about most, because as he’s said, if a person does not launch into work by their early 20s, their chances of ever getting off welfare diminish rapidly.

Employment levels for those aged under 35 are about 3 per cent lower than they were in March. For those born before 1985, however, the number in work is back in pre-crisis black, with those near retirement hanging on until their superannuation balances recover.

Labour market watchers point out that young people not in school or training will be the strugglers in the post-pandemic revival, and skilling them up properly has to be a higher policy priority for both sides of politics.