It’s only two years ago that Josh Frydenberg stood in a crowded House of Representatives to proclaim “the first surplus in 12 years and the first repayment made on Labor’s debt”.
The budget was “back in black” the Treasurer told voters in a speech that pre-dates the 2019 election “miracle”, the bushfires of summer and then the coronavirus pandemic.
Surging iron ore prices has given Treasurer Josh Frydenberg the money to keep spending taps open for a while yet.Credit:Dominic Lorrimer
While the Morrison government talked up its economic management skills for the march back to this “surplus”, it ignored the softness in the economy. The Reserve Bank had interest rates at a then-record low of 1.5 per cent, under-employment was climbing and wages growth – already terrible – was slowing.
Just days after the 2019 election victory, the RBA made its own judgement on economic policy in this country by cutting rates even lower.
The bank had made its own policy missteps in the lead-up to that decision. But ahead of the pandemic, the RBA had resolved to go as hard as it thought possible to get the economy growing even faster.
Today, while inflation hawks continue to argue over-the-top price rises are just around the corner, the RBA is sticking to its core position that the jobs market won’t be tight enough to generate solid wages growth (and hence inflation) for years.
Frydenberg has emerged from the pandemic with a similar mindset.
By explicitly eyeing a sub-5 per cent unemployment rate, and pushing back on calls from parts of the business community and on his own backbench to look at spending cuts, Frydenberg is sharply altering Morrison government economic policy.
Debt (currently $832 billion) and deficit (likely to be north of $150 billion) are here to stay. And Frydenberg knows it.
The shift in policy is recognition of the calls from many prominent economists that with monetary policy on the floor, fiscal policy has to continue to do some heavy lifting.
The surge in iron ore prices, plus the strong bounce-back of the economy, has given Frydenberg the money to keep spending taps open for a while yet.
Treasury, which now estimates unemployment could get to as low as 4.5 per cent before it starts putting upward pressure on inflation, has given Frydenberg the policy chops to maintain the spending line.
Importantly, the Treasurer recognises that getting the economy growing much faster will ultimately deliver benefits to the budget via higher tax revenues and a bit of inflation, which has traditionally been the best way to reduce government debt levels.
It stands in stark contrast to the years of budget deficit self-flagellation the Coalition has engaged in since Tony Abbott’s debt and deficit disaster.
The May 11 budget may need a new title – How I Learned to Stop Worrying and Love Debt.
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