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This is what we need from the 2021/22 Federal Budget

Stephen Koukoulas
·4-min read
Treasurer Josh Frydenberg is due to hand down this year's Federal Budget on 11 May. Source: Getty
Treasurer Josh Frydenberg is due to hand down this year's Federal Budget on 11 May. Source: Getty

On 11 May, just five weeks from now, Treasurer Josh Frydenberg will deliver the Coalition government’s eighth budget since it swept to power in the 2013 election.

It will be a budget with many contradictions, pressures and political spin as Frydenberg negotiates the economic recovery from the 2020 recession, an explosion in government debt to above $1 trillion and the politics of an election due sometime in the next six to 12 months.

The budget will deliver yet another deficit and the forecasts will show the return to surplus will be at least five years away. Maybe 10.

Despite the Coalition have control over the government’s purse-string for eight budgets and its rhetoric of ‘paying off government debt’ and the ‘debt and deficit disaster’ it inherited from Labor in 2013, it will be on track to deliver at least 13 years of deficits, a quadrupling of government debt with a tax take well above the levels of any Labor government in history.

Those ‘back in the black’ coffee mugs paraded before the media by Frydenberg two years ago, as he prematurely claimed a return to surplus, now look rather silly.

In the context of juggling the dynamics of a record level of debt and on-going deficits, Frydenberg would be wise to tread carefully as he winds back the government’s economic stimulus. This is because the economy is still fragile as it recovers from recession and the risks from the Covid-19 pandemic remain elevated.

Indeed, no one can be sure when Australia’s international borders will open which means the boost to economic activity from tourism, foreign students and business travel will remain severely curtailed. It also means that any return to immigration will be slow and possibly delayed until well into the future, which will act as a major impediment to growth and the housing sector in particular.

According to the latest budget data, in the mid-year economic and fiscal outlook from December 2020, the ending of JobKeeper and the termination of the JobSeeker supplement will hep drive a staggering 16 per cent fall in real government spending in 2021-22.

Frydenberg is banking on this massive hole in GDP to be covered by stronger private sector demand, a hope that could easily falter as consumer pause from their recent spending spree and business investment struggles with limited new activity.

Indeed the data in the aftermath of this wind back in government support for the economy will determine whether fiscal austerity has gone too far and too early relative to the quest for a return to full employment and stronger inflation and wages growth.

If the recent stalling retail spending growth and the mini-house price boom falters (which is close to certain), then the current budget strategy will prove to be wrong.

Amid all of this, Frydenberg and the government have an eagle eye on the next Federal election which must be held in the next 12 months.

At the moment, with support for the government faltering and the Labor Party having an election winning lead in the polls, Frydenberg will be wanting to frame the policy decisions in the budget and the overall economic management issue in favour of the Coalition.

Fiscal austerity will make that difficult.

The tax cuts have already been legislated and talk of them is like the proverbial broken record.

If the unemployment rate hovers near 6 per cent rather than continue its path to 5 per cent and lower as fiscal policy is tightened, the Labor Party will have part of its political attention directed to the 2 million or more people unemployed and underemployed.

It would mean that any hopes for a material pick up in wages growth will also be dashed.

It will mean may small businesses, who have borne the brunt of the recession, will remain under severe pressure.

All budgets are important, but the one being framed now will have a particular impact on the economy, the level of debt and the prospects for the Coalition in the next election.

Get set for 11 May when Treasurer Frydenberg hands down what could be a nation changing budget.

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