Josh Frydenberg wants the Budget to push unemployment lower, as the economic winds change
Treasurer Josh Frydenberg has given one of the most significant speeches in his time as Treasurer.
In a speech today, he said the Morrison Government wanted to use its May Budget to deliberately drive the unemployment rate down below 5 per cent.
He said the Budget would not be an “austerity” Budget, because it would prioritise getting people into jobs, rather than chasing a surplus.
It was a radical departure in thinking for the Coalition.
It revealed the Coalition is continuing to slowly turn its back on some of the economic arguments it has been making for decades, further repudiating the economics of Tony Abbott.
So what’s happened?
There’s a quiet revolution occurring in economics at the moment.
We’re seeing more economists questioning whether it has been right for central banks and governments in recent decades to use an unemployment rate of 5 per cent as a policy tool to keep a lid on wages and inflation.
By passively accepting an unemployment rate of 5 per cent (or thereabouts), they say policymakers have potentially been consigning hundreds of thousands of people to unemployment unnecessarily, which has come with severe social and economic costs since the 1980s.
However, recently, more policymakers have begun to believe that the economy can “handle” a much lower unemployment rate than previously thought before wages and inflation begin to grow quickly.
Last month, even Reserve Bank governor Phil Lowe acknowledged that, over the last decade, official estimates of where the level of full employment could be (i.e. the RBA’s so-called “natural” rate of unemployment) could have been repeatedly revised downwards.
Mr Frydenberg has accepted that argument.
In his speech, he said according to Treasury and the RBA, the unemployment rate “will need to have a four in front of it” before significant wage pressures build, so that’s what he wants to do.
An unemployment rate of 4 per cent would still not be genuine full employment, but it would be a vast improvement on previous policy.
The last time the unemployment rate was regularly sitting below 4 per cent was in the 1970s.
Jobs key, ‘the Budget will look after itself’
But then he went further.
Mr Frydenberg also accepted the Keynesian argument that if you concentrate on getting as many people as possible working, the budget will “repair” itself over time.
As the British economist John Maynard Keynes wrote in 1933: “Look after the unemployment, and the budget will look after itself.”
Forget about government debt, in other words. Prioritise job creation and economic growth.
And as Mr Frydenberg said in his speech, he will be exploiting the historically-low interest rate environment to do just that:
Treasury’s projections are that nominal economic growth will exceed the nominal interest rate for at least the next decade.
That is, economic growth will more than cover the cost of servicing our debt interest payments.
As a result, by growing our economy we can maintain a steady and declining ratio of debt to GDP over the medium term as we continue to move towards balancing the Budget.
Looking further ahead, our challenge once we recover from this crisis is to again rebuild our fiscal buffers.
That is a radically different message from the one promulgated by former Liberal Prime Minister Tony Abbott.
Mr Abbott told voters that “you can’t fix the economy unless you fix the budget.”
He used that line repeatedly to justify his scare campaign about “debt and deficits.”
Return to Menzies
Mr Frydenberg’s new budget strategy is a repudiation of the Coalition’s old argument. A complete reversal in logic.
In a sense, it’s hinting at a return to some of the economics of Robert Menzies, one of the founders of the Liberal Party (and Australia’s longest serving prime minister).
Keynesian economic ideas were mainstream in the post-war period in the late-1940s through the 1950s and 1960s, and the Liberal Menzies Government deliberately engaged in deficit spending (during its time in power from 1949 to 1966) to support employment, believing the best thing for the country was to have as many people employed as possible, rather than budget surpluses.
But in the years since the 1980s, Keynes’s economic policies have generally been viewed as associated with left-of-centre politics – until very recently.
Mr Frydenberg will not be pursuing budget deficits with gusto to drive the unemployment rate down, but his acknowledgement that deficits will be necessary to support employment, and that he won’t be worrying about budget surpluses for some time, puts him more in the Menzies camp than Abbott’s camp.
The elephant in the room
However, there’s also a giant elephant in the room.
Treasury’s numbers also show the size of the government’s budget deficit is forecast to reduce from $150 billion this year, to $50 billion next year.
That’s a reduction of $100 billion in 12 months. Worth 5 per cent of GDP. Which is a massive reduction in government support for the economy.
This will occur while the economic outlook remains extremely uncertain. We don’t know when international borders will re-open. We don’t even know when every Australian will be vaccinated.
It could be a high risk strategy, to reduce government support for the economy so dramatically in this environment.
Mr Frydenberg will obviously be hoping the private sector fills the gap.
He’s relying on Treasury forecasts proving correct, over the next 12 months, of stronger-than-anticipated economic growth, with all the benefits that will accrue from that — more taxes pouring into government coffers, fewer unemployment benefits being paid out.
Let’s hope those forecasts pan out.