The federal treasurer, Josh Frydenberg, says the upcoming budget will not take any “sharp pivots towards austerity”, with his focus on ensuring Australia’s economic recovery continues to create jobs.
In a pre-budget speech to be delivered in Canberra on Thursday, Frydenberg will outline the framework for the 11 May budget, saying the government’s strategy will remain on supporting the “transitioning” economy before any focus on budget repair.
Cautioning that Australia remains in “unusual and uncertain times”, Frydenberg also signals the government will provide further fiscal stimulus in a targeted manner in the budget, acknowledging the private sector is still emerging from the hit of the Covid-induced recession.
“Private sector growth is the essential ingredient in maintaining a strong economy and a sustainable fiscal position over the longer term, you can’t have one without the other,” Frydenberg will say, according to excerpts from his draft speech.
“Large scale government support is no substitute for sustainable jobs in profitable firms.”
But he said with the government responding “flexibly” to rapidly changing circumstances, policies would continue to be adapted to underpin a private-sector-led recovery, with an eye on driving unemployment below 6%.
“We recognise the Covid-19 pandemic is far from over, and we know that some businesses and sectors are still doing it tough,” Frydenberg says.
“Against the backdrop of a highly uncertain global economic environment, it is prudent to continue to support the economy and ensure that our recovery is locked in. Looking further ahead, our challenge once we recover from this crisis, is to again rebuild our fiscal buffers. We have done it before and we will do it again.
“But we won’t be undertaking any sharp pivots towards ‘austerity.”
The approach, initially outlined by Frydenberg in last year’s budget, has so far seen the government focused on limiting the damage to the labour market from the pandemic downturn, with fiscal support to the economy peaking at 3.7% of GDP, or about $70bn, in the September quarter 2020.
By the March quarter this year, this support had more than halved to 1.4%, or about $30bn.
The 2020-21 budget confirmed the government’s overall stimulus had amounted to $507bn, including $257bn indirect economic support, leading to an estimated deficit this year of $213.7bn – equivalent to 11% of GDP.
The job keeper wage subsidy, which the Coalition initially resisted, is estimated to have supported nearly a million Australian businesses over the past 12 months. It was wound up at the end of March.
The $90bn program provided a wage subsidy to 3.6 million workers, paid directly to businesses who could demonstrate a decline in turnover, with some of those businesses going on to turn a profit.
Frydenberg says winding up the scheme was “the right decision for the economy, for the labour market and for the budget,” and used the most recent employment figures to argue “doomsday predictions” regarding its withdrawal had not materialised.
He said early data showed the number of people on income support had fallen by approximately 46,000 after the wage subsidy wound up with job vacancies at a record high, but warned against “complacency.”
“We need to continue working hard to drive the unemployment rate lower [and] that is what next week’s budget will do,” he says.
“We will not move to the second phase of our fiscal strategy until we are confident that we have secured the economic recovery. We first want to drive the unemployment rate down to where it was prior to the pandemic and then even lower. And we want to see that sustained.”
Frydenberg’s speech will coincide with the release of a technical working paper on what is called the Nairu, the non-accelerating inflation rate of unemployment, which is the jobless rate at which inflation and wages are then expected to rise.
The updated Nairu puts the figure at between 4.5-5%, lower than a previous estimate of 5%, meaning the government will be pushing towards an unemployment figure with a 4 in front of it before moving towards the fiscal repair.
However, Frydenberg said despite the focus on economic support, the government’s “core values” had not changed, and its medium-term fiscal strategy was to stabilise and then reduce gross and net debt as a share of GDP over time. He said given the low-interest-rate environment, economic growth would more than cover the cost of servicing debt interest payments.
“We remain committed to lower taxes, containing the size of government, budget discipline, and guaranteeing the delivery of essential services,” Frydenberg says.
He flagged that this year’s budget would report lower corporate tax receipts as a result of the downturn, but indicated the government’s spending effort had resulted in economic growth returning to pre-pandemic levels in the first quarter of this year.
“Because of our policy interventions, Treasury had previously estimated that the economy will be 4.5% larger in 2020-21 and 5% larger in 2021-22 than if we had not intervened,” Frydenberg says.