Treasurer says ‘crisis level’ spending must stop amid Australia’s improving economic conditions
The treasurer, Josh Frydenberg, says improved economic conditions will allow the government to deliver a “targeted” cost of living package in this month’s budget, while gradually improving the budget bottom line.
In the traditional pre-budget speech to the Australian Chamber of Commerce and Industry on Friday, Frydenberg will set out how the 29 March budget will mark a return to normal budget settings as Australia emerges from the Covid-19 pandemic, warning that “crisis level” spending must stop.
The Treasurer, who is facing calls to do more to ease cost of living pressures that are being exacerbated by rising fuel prices, will argue that the government needs to start pulling back on spending, or risk making inflationary pressures across the economy worse.
“Crisis level economic support must not become entrenched,” Frydenberg will say in the speech on Friday.
“With our tight labour market and our strong economic recovery, continued support at those levels would do more harm than good. It would risk putting further pressure on inflation, interest rates and cost of living.”
Amid mixed views within the Coalition about the benefit of cutting the fuel excise and extending a low and middle income tax offset (LMITO), the treasurer will say that any support for families to address cost of living concerns would need to be limited.
Frydenberg has previously indicated that extending the LMITO – which has an annual cost of about $7bn and would not be paid out until after the next financial year – could cause the Reserve Bank to revise its inflation forecasts upwards.
The prime minister, Scott Morrison, has indicated the government is conscious of the hip-pocket effect of rising fuel prices, and has left open the idea of cutting or freezing the fuel excise as John Howard did in 2001.
Frydenberg said the economic recovery that was now under way would deliver a “fiscal dividend” to the budget which would allow the government to move to its second phase of fiscal repair while also addressing cost of living concerns.
“In the budget in less than two weeks’ time, there will be further measures to support families to meet the cost of living pressures, in a targeted and proportionate way,” he says.
He points to the full employment being “within sight”, December’s strong economic growth figures and private sector investment levels, as indicators of the country’s stronger than expected recovery.
“It is this underlying strength and resilience of Australia’s economy that now enables us to transition to the second phase of our fiscal strategy,” Frydenberg says.
“The time for large scale economy-wide emergency support is over (and) fiscal settings need to be normalised.”
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Under the second phase of the fiscal strategy, the government will begin to reign in spending and start to reduce budget deficits, while also starting to “stabilise and then reduce” debt as a share of the economy.
Federal government gross debt has reached $866bn and is forecast to surpass $1tn by 2024-25. The amount of financial support provided throughout the Covid pandemic has totalled $314bn.
Commonwealth outlays on the economy and health during the Covid pandemic amounted to more than 14% of gross domestic product.
Saying the government can start to reduce debt as a percentage of GDP as a result of the improving budget circumstances, Frydenberg will emphasise the importance of a gradual winding back of support, so as not to threaten the economic recovery.
“A sharp and sudden tightening in the fiscal settings would likely be counter-productive, undermining the economic recovery and ultimately hurting the budget.”
“While Australians can be confident about their economic future and the underlying resilience of our economy, what recent years have shown, is that we live in very uncertain times.
“The consistent lesson from these successful fiscal consolidations is that they are almost always achieved gradually and are underpinned by a strong economy and genuine fiscal discipline.”
Provided that economic growth remained higher than the interest rate Australia paid on its debt, then the debt to GDP ratio would continue to fall, “even without running surpluses.”
“A gradual and measured pace of consolidation ensures that the economy can continue to adjust and grow, even as fiscal policy normalises.
“It’s about striking the right balance.”
Frydenberg’s comments come as Thursday’s labour force statistics showed unemployment fell to 4% in February, down from 4.2% in January and its lowest level since 2008.
Morrison incorrectly claimed it was the lowest level in 50 years.
“The unemployment rate at 4% is the lowest rate that we’ve seen in almost 50 years. I was five years old when we last had an unemployment rate this low – and I think that says something,” Morrison said.
The employment minister, Stuart Robert, later clarified, saying it was the “equal lowest”, and the “last time it was 4% was August 2008, February [2008] and [1974].”
“That’s why I chose my words carefully to say it is the equal lowest rate – so the prime minister is absolutely correct,” Robert said.
The unemployment was 4.01% in August 2008 and 3.98% in February 2008.
The Australian Bureau of Statistics figures showed that 77,400 people joined the workforce in February, full-time employment grew by 121,900 jobs and part-time work fell by 44,500.
