No B.S Friday: It’s a very different budget…. Or is it?
So something weird happened in the budget.
On the face of it, the outlook for the deficit didn’t change. In 2021/22, the deficit is going to be $106bn – a massive number but we’ve become insensitive to numbers like that.
Six months ago when Treasury released their mid-year outlook, it was $108bn. So pretty much exactly the same.
However, a lots actually changed in the past six months. The economy is recovering a lot quicker than expected. We’ve also got a massive commodity boom driving a surge in resource revenues.
And so even though the economy is tearing along and government coffers are filling up, we end up with the exact same deficit?
How’s that?
Well, the government is just simply spending more money.
And why are they doing that?
Isn’t this meant to be the party of fiscal discipline? If the economy is booming, and revenues are soaring on the back of a mining boom, why isn’t the government trying to pay down the gargantuan (by historical standards) deficit?
That is a very, very good question.
Some argue that Frydenberg and co have had a change of heart.
They were tempted to deliver an austerity budget (where spending was wound back and taxes were possibly raised) but Phil Lowe at the RBA and Steven Kennedy at Treasury got in their ear and convinced them to keep on spending.
That’s the line the AFR is running with:
When Treasurer Josh Frydenberg was in his Canberra office four weeks ago and was told the unemployment rate had – again – fallen faster than anticipated, to 5.6 per cent for March, the Treasurer became confident that he could pull off the great budget pivot.
For months, Treasury and the Reserve Bank of Australia had privately been nudging the government not to turn off the fiscal support too sharply after the $90 billion JobKeeper wage subsidy finished.
The “official family” of public policy economists believed the government should get more ambitious on its unemployment target and aim to reduce the jobless rate below 5 per cent to get wages growth accelerating and inflation rising.
… Yet if Frydenberg was to shift from the government’s fiscal strategy of a “comfortably below” 6 per cent jobless rate target before embarking on budget repair, he wanted any sub-5 per cent unemployment goal to be realistic and achievable.
… “We have a historic opportunity to drive this unemployment rate down to where it was before the pandemic and even lower,” Frydenberg told The Australian Financial Review in a pre-budget interview.
That is a new paradigm for this political party.
Massive deficits to drive unemployment down and run the economy hot.
Just 18-months ago, it was inconceivable that you’d get anything like that out of the Coalition.
But, as I’ve noted a few times, there’s been a paradigm shift in the way we think about the economy, and the role the government can play. (Go back and read the pieces I wrote about MMT for more info.)
So is that’s what’s going on?
Maybe. That’s the charitable version of events.
The more cynical might wonder if the government is trying to turn things around after a disastrous six months. With a string of sexual abuse allegations coming to light, and a vaccine roll-out not doing much rolling, there was a golden opportunity to turn it all around with a good old fashioned cash-splash.
A bit of pork for you. A bit of pork for me.
And since fiscal discipline had already been thrown out the window, it’s in for a penny, in for a pound, and why not trying and milk some political capital out of the situation?
Never waste a good crisis.
So which is it? Paradigm or pork?
Who knows?
But whatever the case, the government’s commitment to run the economy hot is intact.
Let the boom continue.
JG.