Treasurer Josh Frydenberg will use his pre-election budget to start repairing a fiscal bottom line severely damaged by the COVID-19 recession but do so without resorting to deep cuts that could jeopardise the nation’s economic recovery.
In a speech to be delivered on Friday, Mr Frydenberg will reveal the March 29 budget will show a “substantial” improvement in the coming financial year’s deficit, which only a few months ago had been forecast to reach $98.9 billion.
Josh Frydenberg selling the 2021-22 budget in May last year. This year he will reveal a much improved, but still deeply red, bottom line.Credit:Jessica Hromas
And in a direct challenge to those within the Coalition pressing Mr Frydenberg to move more quickly to repair the budget, the Treasurer will argue debt as a share of the economy can be reduced without running budget surpluses.
In his 2019 budget, delivered just before Prime Minister Scott Morrison called that year’s election, Mr Frydenberg promised the end of net debt and a string of budget surpluses. The Liberal Party even sold fundraising “back in black” coffee mugs to mark the address.
But that year’s summer bushfires and then COVID-19 upended his promises. The budget has shown back-to-back record deficits, including an all-time high of $134.2 billion in 2020-21.
In his mid-year update, Mr Frydenberg forecast a $99.2 billion deficit this financial year and deficits for the rest of the decade. Gross debt was tipped to peak towards the end of the decade at more than 50 per cent of GDP.
However, strong prices for commodities such as iron ore and coal plus the nation’s economic recovery, which has resulted in unemployment falling to a 14-year low of 4 per cent in February, has substantially reduced the deficit.
Mr Frydenberg will reveal that rather than spending all of the windfall, the government will start the second phase of its budget repair strategy, which is to stabilise and then reduce gross and net debt as a share of the economy.
“This year’s budget will confirm that this is the trajectory we are now on. It will show a substantial improvement to the budget bottom line – the product of more Australians in work and fewer Australians on welfare,” he will say.
“Gross debt as a proportion of GDP will peak lower and earlier than forecast at the mid-year economic and fiscal outlook. Gross debt will not only stabilise but will decline over the medium term. This is the fiscal dividend of a strong economy.”
Ahead of COVID-19, Mr Frydenberg pledged to eradicate government net debt by 2030 while arguing the government’s interest bill would also fall. This month’s budget, however, is expected to show interest costs growing due to a lift in global borrowing costs in the face of higher than forecast inflation.
This has prompted concerns within the fiscally conservative arm of the Coalition about the amount of debt taken on by the government, which stands at more than $863 billion, and the long-term interest bill left to future taxpayers.
Mr Frydenberg will argue as long as the economy is growing faster than interest rates, the debt burden on taxpayers will fall without jeopardising the nation’s recovery.
“By growing our economy we can maintain a steady and declining ratio of debt-to-GDP even without running surpluses,” he will say.
“A gradual and measured pace of consolidation ensures that the economy can continue to adjust and grow, even as fiscal policy normalises.”
While unemployment has fallen sharply, inflation has lifted faster than wages for most workers. Petrol prices are at record highs in most capital cities but inflation issues – around food, childcare and other services – were already growing ahead of Russia’s invasion of Ukraine.
The government is under pressure to use the budget to help voters deal with high prices. This has included an internal debate over fuel excise, personal tax relief and targeted handouts to particular groups.
Mr Frydenberg will confirm the budget will provide some forms of assistance.
“There will be further measures to support families to meet the cost-of-living pressures, in a targeted and proportionate way,” he will say.
“We will also continue to support productivity-enhancing investments and structural reforms that build a stronger economy, support private investment and create more jobs.”
Deputy Labor leader Richard Marles said the government was promising cost-of-living relief long after it had become a problem for ordinary Australians.
“We know this cost-of-living crisis hasn’t happened overnight – prices were rising well before the conflict in Ukraine – but Scott Morrison and Josh Frydenberg have been silent,” he said.
“Family budgets are getting squeezed, Australian working families are under extreme pressure, and the risk of another three years of Scott Morrison, Barnaby Joyce and Josh Frydenberg is more of the same.”
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2022-03-17 11:00:00Z
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