Budget must be based on pragmatic, centrist policies


As Australia faces a once-in-a-century economic crisis, the federal government has taken seriously its vow to respond to the COVID-19 crisis with centrist and non-ideological measures. The federal budget, to be handed down on Tuesday, will reveal the depth and extent of that commitment.

Treasurer Josh Frydenberg had little choice but to jettison one of the shibboleths of conservative politics – the commitment to balancing the budget, at least in the short-to-medium term. In a speech last week, he said he would not worry about the federal government deficit until unemployment was “comfortably” below 6 per cent, a benchmark some economists say will not be met for several years.

On that basis, Mr Frydenberg is expected to announce a second round of stimulus measures beyond the JobKeeper wage subsidy, which is due to expire in March.

As a result, most economists predict a deficit of about 12 per cent of gross domestic product this financial year and a sea of red ink in the next few years, unimaginable only a few months ago.

Net debt will rise beyond $1 trillion or about 45 per cent of GDP within two years, about four times higher than when Paul Keating warned Australia was at risk of becoming a banana republic.


Mr Frydenberg has unequivocally done the right thing in abandoning any rigid timetable for a return to surplus. After the economy contracting a record 7 per cent in the June quarter, business groups, most economists and the Reserve Bank of Australia all agree that it is still far too weak to be worrying about the deficit.

Yet the budget will reveal whether Mr Frydenberg has chosen a pragmatic approach to the next round of stimulus spending.

The package must be fair and also designed to put cash in the pockets of those most likely to spend it. It should also set Australia up for long-term recovery.

The pre-budget speculation is that Mr Frydenberg will announce income tax cuts, which are popular with many voters, not just Liberal Party supporters, and appeal to groups such as the Business Council of Australia, which argue that a flatter tax scale has long-term economic benefits.

Yet the design of the tax cuts will be crucial. Mr Frydenberg will be on solid ground bringing forward the stage two tax cuts for taxpayers earning more than $41,000, that are due to take effect in July 2021. But there are questions about the wisdom of bringing forward the stage three tax cuts for middle- to high-income earners that are not due to start until July 2024.

Mr Frydenberg should consider significant support in the form of additional tax credits or one-off payments to low- and middle-income earners too. Not only do they need it but they are likely to spend a much bigger share of the extra cash in their pockets.

The Herald believes, for example, there is a strong case for increasing the JobSeeker payment for the unemployed on a permanent basis beyond January 1, when it is due to drop back to its pre-March level below the poverty line. This is a move supported by a broad range of interest groups, from the Business Council of Australia to ACOSS.

Mr Frydenberg will also have been evaluating whether to continue the Liberal Party’s traditional opposition to direct government spending as a form of job creation.

Conservative doctrine favors offering tax breaks to encourage businesses to invest and hire but, at a time when businesses are cautious, tax breaks might not be enough to convince them to take the plunge. Mr Frydenberg should also look to increase government spending on areas such as social housing, training programs and the underfunded aged care sector.

In the medium term, once the economy recovers Mr Frydenberg will have to outline his path back to a balanced budget. But for now, Mr Frydenberg’s priority must be a budget that gets the economy back on track as effectively and fairly as possible.

The Herald editor Lisa Davies writes a weekly newsletter exclusively for subscribers. To have it delivered to your inbox, please sign up here.

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