This time next week, the 2022 federal election will be done and dusted and the Australian people will have decided whether Scott Morrison or Anthony Albanese will be Prime Minister for the next three years.
Whichever side we collectively choose, the newly elected government will be confronting a quite alarming list of economic policy challenges that will require difficult and politically unpalatable decisions to be taken.
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While the economy is growing and the unemployment rate is low, which is good news, there are a range of structural economic challenges in current policy settings that threaten to undermine this position.
Budget deficits and government debt
The last budget saw a range of economic policy errors. The government ramped up spending and confirmed tax cuts which ensured the run of budget deficits will extend to an incredible 20 years.
This will see government debt continue to rise to at least $1.2 trillion which is a problem that leaves Australia’s financial position vulnerable as global interest rates move higher.
Conversely, it was good economic policy to run budget deficits during the global financial crisis in 2008-10 and during the pandemic in 2020-21. Indeed, deficit finance in both instances helped to support jobs and businesses in these troubled times.
But when the economy is expanding with high inflation and low unemployment as it is now, the budget should not be in deficit one moment longer than need be.
Indeed, a budget surplus would be prudent for the next few years given the expectation that high inflation and low unemployment will remain for the near term.
Alas, when Treasurer Josh Frydenberg delivered the budget in March, his policy setting delivered deficits of $78 billion in 2022-23, $57 billion in 2023-24 and $47 billion in 2024-25. And these projections assume the economic expansion continues without disruption.
What is needed from the new government is a budget that looks to move the budget towards a surplus within the next two years.
Part of this will involve the government ‘banking’ the extra tax revenue and lower government spending that will accrue from high inflation and low unemployment. More than that will be needed to get to surplus, and that includes trimming the growth in government spending and collecting more revenue.
Whomever is Treasurer next week, it will clearly be a challenge to do this.
The new government will have to deal with inflation surging to a 30 year high. The tightening in the budget, mentioned above, will not only help repair the budget but will take some of the heat off inflation pressures.
More of the focus on bringing inflation back under control and within the two to three per cent target band will be with the Reserve Bank of Australia (RBA). It is clear that there are a series of interest rate hikes in the offing and these are unavoidable given the inflation pressures in the economy right now.
While the RBA is somewhat independent of the government, the Treasurer next week would be hoping that the interest rate hikes are early and aggressive.
The earlier those rate hikes occur, the quicker the dampening pressure on inflation will be.
Either way, it looks like inflation will be a problem until well into 2023.
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Other economic policy challenges
The budget and interest rates are perhaps the most obvious issues for the new government.
But there are other challenges.
Structural policies that boost productivity are vital.
Education, skills and training are part of a strong economy, as is access to affordable childcare which boosts workforce participation.
Fast-tracking the transition to renewable energy is a key economic reform that will help underpin productivity.
Add to that policies to see wages growth lift, boosting incomes and spending and sustaining the economic expansion will be a challenge for the new government.
As vital as these reforms are, they take considerable time to work through society and into the economy. World-best education can take more than a decade to take effect, as will environmental policy reforms.
All up, the winner of the election will face some huge challenges. Tough and potentially unpopular decisions will need to be made regardless of which side wins.