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Business/Robbery etc.

17 October 2020

9:00 AM

17 October 2020

9:00 AM

Does Hello Big Spenders mean Farewell Fiscal Discipline?

But will the private sector deliver? In line with classic Liberal party policy, Treasurer Josh Frydenberg’s covid-recovery massive-deficit budget has put most of its eggs in the private sector basket. If the private sector does not respond adventurously to the budget’s unprecedented multi-billions of dollars of government incentives, the needed economic recovery from the Covid-19 recession is doomed – and so is the government, no matter how good the post-budget opinion polls. And with so many big-end-of-town corporate boards now dominated by risk-aversion rather than entrepreneurial imagination, there is no guarantee that the Frydenberg-Morrison gamble on private rather than public expenditure as the most effective economic stimulus will pay off. The universally enthusiastic response to the budget from the big business lobby groups does not necessarily predicate appropriate action. Fortunately, the active response is much more likely to be strongly positive from the small-to-medium sized businesses that are the nation’s major employers and where the Covid-19 recession has hit hardest, with most of the job losses, and which therefore provide the greatest scope for job recovery.

This reliance on the private sector instead of big public projects to restore the economy (the reverse of Labor’s traditional policy) has established a political divide that will heavily influence the next election. This is reflected in the inevitable partisan media responses. The Guardian, after damning the budget for not mentioning climate change, says it ‘reveals an ideology that is set to kill any recovery just as it is getting started… [with] the government committed to the idea that the private sector will save us’. It notes with alarm that in the current financial year public sector demand is forecast to rise by only 3.5 per cent, the lowest for six years and less than during the GFC (with no stimulus to social housing or renewable energy) while the budget ‘somewhat laughably’ assumes the private sector will grow by twice as much at seven per cent. It’s a theme the ABC, naturally, echoes, with its report that ‘The budget disappoints many experts with its lack of big infrastructure projects’, although it did include a comment from former BCA boss Tony Shepherd that such big projects would be inappropriate in the present crisis as they take too long to start and the need for stimulus is immediate.

As columnist Gerard Henderson pointed out last weekend, ‘It is fashionable nonsense to accuse the prime minister and treasurer of hypocrisy for throwing the switch to debt and deficit and breaching the Coalition’s traditional commitment to expenditure restraint and budget surpluses’. He pointed to the ABC’s Leigh Sales’ claim that the present deficit exposes as ‘dishonest and cynical’ the Coalition’s past criticism of Labor debt and deficits as ‘signs of economic incompetence and mismanagement.’ Sales’ line, soon embraced by some of her colleagues in the public broadcaster, was, Henderson says, essentially that the Rudd Labor government was right to spend, borrow and build up debt in response to the GFC and that the Morrison government’s current big spend indicates double standards (without acknowledging either the massively different size of the crisis or the different nature of the spend) As Mathias Cormann told Sky News, the current increase in spending (particularly on incentives to the private sector) is designed to cover just a short period up to 2022 before subsiding, unlike Labor’s GFC (largely public sector) spending that continued well after the time when it was economically required.

The hypocrisy attack was taken up by the Australian’s Peter van Onselen, with the curious claim that the spending principles adopted by Labor in the GFC are the same as those being adopted by the Coalition now. This is in conflict with his own (correct) summation that ‘Frydenberg’s budget reveals plans that rely on a business-led recovery [while] Labor, in contrast, wants government to do the heavy lifting’.

But apart from these political and philosophical issues, there are unintended consequences from the universal acceptance that big and early stimulus was needed, that budgetary restraint was no longer appropriate, that whether the debt splurge would end up good or bad for the economy would depend on what is done with the money, and that, according to Treasury, we face at least ten years of deficits. So, in the absence of any prospect of a surplus, the financial discipline that has marked attempts over the past decade to restore the budget to surplus will no longer apply. According to financial commentator Alan Kohler, there are already signs of that in the budget’s $15.8 billion in ‘other spending’ over four years (submerged by the headline big hits of the $74 billion JobMaker plan and the $25 billion Covid-19 response package). ‘Unlike the two big-ticket programs, this spending is not temporary and almost all of it involves hiring people… How is [new] Finance Minister Simon Birmingham going to start saying ‘no’ again [to departmental spending bids] when there can be no credible aspiration to get the budget back into surplus?

Returning to surplus has been a guiding political imperative during seven years of Coalition rule ….[and] a fundamental principle of conservative government”. Kohler reckons this philosophy is crumbling, ‘that deficits no longer matter politically, just as they don’t matter economically’. Aiming for a surplus can’t be the reason for saying ‘no’ to mendicant ministers.

But the prospect of a lack of political will to exercise financial discipline has serious implications now that the budget surplus has been ‘formally and permanently and irreversibly buried as a concept, as an ambition and as a reality’ according to financial commentator Terry McCrann. He warns of the consequences of the absence of the ambition – and, crucially, the restraint – of getting the budget in the black. ‘Both the policy and political debate will be unmoored in a dangerous way not seen since before the 1975 election defeat of the Whitlam government’. So the departure of the outstanding Finance Minister Mathias Cormann to become secretary-general of the OECD represents a heavy blow to the vital need to restore financial discipline in this big-spending, government-handouts, vote-buying, populist, new political environment.

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