Josh Frydenberg’s high-risk economic strategy
It is hard not to think that if Mathias Cormann was still the finance minister, the budget would have looked a lot different. More Peter Costello and less Anastacia Palaszczuk.
Former Senator Cormann had a couple of hard rules which the current expenditure review committee of cabinet has chosen to ignore; expenditure should not increase by more than 2% in real terms and the budget should balance over the cycle.
Josh Frydenberg has chosen to adopt a Keynesian approach to economic recovery. His sole focus is the reduction in unemployment and his aim is to get the rate down to 4.5% within the four-year budget framework. He has adopted an approach that involves massive increases above the long-term trend in expenditure, the deficit and $1 trillion in debt.
The big risk is that a large proportion of this investment represents structural changes that are baked in over the long term.
Increased expenditure on aged care, childcare and the NDIS will go on indefinitely, which is inconsistent with Keynesian policy theory. This says that governments should spend when there is latent capacity in the economy but should withdraw expenditure and engage in fiscal consolidation when the economy is at full capacity, otherwise, there is a risk of high inflation.
The other risk in the Frydenberg strategy is that the big expenditure on social policy measures will overhang the private sector and have a negative impact on business investment. Expenditure on aged care, childcare and the NDIS has a minimal impact on productivity growth. This puts an increased onus on the private sector to increase productivity in order to fund the increased demand for essential services.
Neo-classical economics says that increased growth and productivity is the result of increased investment in capital, labour and technology. In Australia, this investment is captured in the business investment number. In the 1960s business investment was 25% of GDP, in 1980 the figure was 20% as it was in 2013. However, in the last year business investment was down to less than 10% of GDP.
The government is relying on tax concessions to stimulate business investment. There are wide-ranging income tax cuts, which it is hoped will stimulate consumer demand and in turn provide an incentive for more business investment. There are also business tax cuts that are geared to providing deductions for business investment. However, at the moment there is no sense that business will take up the incentive to undertake substantial structural reform.
The other growth drivers identified in contemporary economies are knowledge and skills.
Knowledge can be divided into two types: general knowledge and specialist knowledge. The Gillard government made a big investment in specialist knowledge by creating uncapped university places. This was meant to lead to more business investment and real wage growth. Unfortunately, this didn’t happen, and many graduates were forced into the gig economy.
The current government is putting the emphasis on skills training and short courses at university. It remains to be seen if these courses provide an incentive for business to upgrade the skills of their workforce in order to invest in technology-intensive production techniques.
The budget has deficits stretching out to 2031-32. It is relying on natural growth at very low levels to reduce the debt-to-GDP levels.