Lifting the Fog

The Treasurer has delivered a Liberal budget in illiberal circumstances, built on enterprise, families and hope. By Nick Cater.

As recently as eight months ago, Treasurer Josh Frydenberg was on track to deliver the first Budget surplus in 12 years. That was before the arrival of COVID-19 and the extensive forced reduction in business activity, for which no amount of government spending can fully compensate.

Frydenberg’s task on Tuesday was not to end the recession. That’s a job for businesses and consumers. It was to create the policy settings to allow business to thrive and jobs to flourish.

We started in a good place. In February, welfare dependency was at its lowest level in 30 years and unemployment had fallen to 5.1%. Our debt position was far better than that of comparable developed nations. The architecture of Tuesday’s Budget builds on those advantages.

First, the Government has set out to put money in consumer pockets, boosting aggregate demand and driving greater economic activity.  It has brought forward income tax cuts by two years, boosting household and disposable income. 

Second, it is backing business, since nearly nine out of every 10 Australian jobs are in the private sector. 

Expanding the scope of the instant asset write-off scheme to include businesses with a turnover of up to $5 billion has the potential to release tens of billions of dollars of investment. Instead of waiting 60 years to right off a harvester, a farmer can gain the benefit in year one. The introduction of loss carry-back provisions provides further relief, allowing losses to be offset against tax on profits paid in the past.

Infrastructure investment, removing unnecessary red tape for credit providers and skills training fills out the picture of a budget that looks to support the private sector, rather than attempting to deliver technocratic solutions from on high, as the Opposition Leader leant upon in his Budget in Reply.

This was a novel budget to address novel challenges stemming from a novel virus. The deliberate shut down of businesses by government was unprecedented. Incompetent premiers locked people in their homes for lengthy periods.

Opening up borders and reducing restrictions from extreme to sensible is the best thing that can happen to return sanity, hope and jobs. These decisions, however, are largely out of the Treasurer’s hands.

The incentives for manufacturing must avoid backsliding into the old habit of protectionism.

The growth in prosperity in the last 30 years has been driven in a large part by the expansion of trade. Free trade has delivered better and cheaper goods for consumers while finding markets for Australian agriculture, resources and services.

Australian manufacturing has responded well in this crisis. Production lines for manufacturing sleep apnoea supplies switched to ventilator production. Gin distilleries in Tasmania switched to making hand sanitisers. It demonstrates the competitive strengths and agility that ensure a positive future for sophisticated manufacturing. 

It’s not about government handouts. It's actually the opposite. It is about assessing the inputs into manufacturing and working out how to make them cheaper.

Chief among those is cheap and reliable energy, the imperative driving the Government’s gas strategy. Any mention of gas was conspicuously absent from the Opposition Leader’s Budget in reply speech on Thursday night.

There are more measures in the wings. More flexible labour markets is crucial to the manufacturing strategy. We've put some more tax incentives around research and development. So too are reductions in red tape.

Australia is never going to be a country that excels in low value manufacturing. It doesn’t need to be. The future is in high value manufacturing leveraging intellectual property. 

Our circumstances warrant a renewed discussion about the ideal rate of population growth. Treasury forecasts net negative overseas migration for the first time in 46 years. Net overseas migration will fall from a positive of 150,000 in 2019-20 to a negative of 72,000 in 2020-21.

Should we seek a return to the high immigration numbers of recent years? Can high immigration remain a key driver of economic growth? I leave that as an open question. It is a debate we must have.

Frydenberg’s budget this week was, above all, an optimistic budget, counterintuitively under the circumstances. The economic expectations that shaped it were based around the assumption of a snapback to economic activity as the COVID-19 restrictions are eased.

It is a credible forecast. This recession, unlike any previous recession I know of, began as a supply-side recession. There was money to spend and business to be done. It was curtailed purely by the action of government.

The chances of a snap-back recovery, however, reduce every hour that state economies are held hostage by extreme and unnecessary measures. The longer the Victorian lockdown goes on, and the longer the closure of state borders are in place, the more unlikely it is that the Treasury’s optimistic forecasts will be realised.