The economy is not up to scratch and the Treasurer needs to do more

The big downgrade to economic growth forecasts in the latest budget numbers has reopened the debate over whether Treasurer Josh Frydenberg should abandon his pledge to get the budget “back in the black”. In the Midyear Economic and Fiscal Update released on Monday, Treasury cut the expected growth rate for this financial year to 2.25 per cent – down from the 2.75 per cent anticipated in April at the time of the federal budget. This is not calamitous by any means but it is subpar. The same could be said for the outlook for wages and employment.

Some mainstream voices including Bill Evans, the chief economist at Westpac bank, some peak business groups and the International Monetary Fund suggest Mr Frydenberg should stop worrying about the budget surplus and bring forward spending to boost the economy. They argue that the budget surplus, now expected to be just $5 billion this year instead of $7 billion, is largely symbolic.

Abandoning the surplus would free up cash for carefully-targeted spending such as bringing forward sensible infrastructure projects or planned tax cuts. These voices also argue that without fiscal stimulus, pressure will grow on the Reserve Bank of Australia to cut the official interest rate below its current record low, even to zero. That would be a risky experiment which could further distort asset prices in particular and the economy in general.

The Herald has sympathy with these arguments and it is certainly not among those who reject using fiscal policy to manage the economic cycle. For instance, the cash splash by the ALP in late 2008 helped Australia avoid recession during the global financial crisis. The question is whether such an approach is necessary now.

From a political point of view, abandoning or even delaying a surplus would be an embarrassment to the Coalition after it spent so long complaining about Labor’s “debt and deficit disaster”. But the case for trying to post the first budget surplus in a decade is not only about political one-upmanship. It would also send a positive signal to global financial markets and foreign investors.