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Opinion: Frydenberg’s budget conundrum

Josh Frydenberg.
Treasurer Josh Frydenberg is about to deliver his second 'pandemic budget'. Source: Getty (Photo by Sam Mooy/Getty Images) (Sam Mooy via Getty Images)

The budget next Tuesday will embrace a hotch-potch of issues.

In delivering the 2021-22 budget, Treasurer Frydenberg will confirm a record $80 billion of cuts in government spending in a single year and this will feed into a sharply lower budget deficit; yet at the same time, it will embrace a pro-growth strategy with a central plank of getting the unemployment rate down towards 4 per cent.

It will also have, in the forecasts, an expectation that gross government debt will exceed $1 trillion – a new record high – but that this is, all of a sudden, not a problem because interest rates are low and the accumulation of debt is critical in driving the economy towards full employment.

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It will, in all likelihood, embrace a raft of relatively small spending programs, aimed electoral success, remembering that the next Federal election is due within 12 months.

Budgets are less important

The true economic impact of the annual budget process has diminished over the years. Frankly, they are little more than a mass accounting exercise where the government outlines the dollar value of its spending and revenue in extreme detail.

Gone are the days when the budget would see the Treasurer of the day pull a policy rabbit out of the hat to surprise the markets and voters.

What governments do, and rightly so, is manage their spending and taxing policies throughout the year, as needed, and as the policy formulation process is finalised and the reforms are rolled out.

The budget brings this all together, but nowadays, the shock economic policy decisions are few and far between on budget night.

Financial markets no longer have much interest in the budget because of this.

Indeed, on budget night, it is all but certain that what happens in the European and US financial markets will have a much greater influence than anything the Treasurer may announce on child care funding, tax changes or indeed, on what the budget bottom line will be.

Fiscal policy matters

Prior to COVID, there were an array of economists who downplayed the role of government in economic management. That zealotry has been smashed by how effective governments have been during COVID is cushioning the effect of the health crisis on jobs and business operations, and in driving the recovery.

Fiscal policy matters. This is as it always has, even though many had their head in the sand about how progressive spending and taxing policies can change economic conditions for the better.

Which brings us back to the budget next week.

Politics

With Treasury forecasting two strong two for the economy and embracing a target for the unemployment rate to fall towards 4 per cent, Frydenberg will present a fiscal policy strategy that will be framed as good news.

After all, who would not be pleased to outline a platform where the economy returns to full employment, with a pick-up in wages growth and a surge in business investment and at the same time, outline a realistic timeframe for the budget to return to surplus?

The election is about a year away and a lot will happen between now and election day to sway the way we vote.

But in terms of the economy, the budget will bring together a range of issues that will be positive for the government that Labor will be hard-pressed to combat.

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