Austerity? Out. Repair? Out. A fine budget for the short term, but long-term challenges remain

It is a happy accident that the coming budget is likely to be the last before the next federal election. The government has avoided the temptation to cut spending in the name of fiscal responsibility. That would have put post-pandemic economic recovery at risk.

For a while it seemed as if the treasurer was contemplating “budget repair” — that is, keeping new spending to modest levels and taking the windfall from better-than-expected economic growth to the bank.

Fiscal conservatives would have applauded such a budget as a first step towards reducing a record government deficit. It would not have reduced Australia’s equally record debt (while the budget remains in deficit, each new deficit further adds to debt) but total debt would be lower than under alternative strategies.

Josh Frydenberg was no doubt urged to take this path by those in his party who cling to the quaint idea that deficits signify bad government, some business lobbyists, and a stirring editorial from The Australian Financial Review.

Now it seems the call of the election has become the louder influence. The final budget strategy was almost certainly contested territory until recently, but over the past week there have been a multitude of announcements aimed at electoral gain — or to address perceived areas of government weakness — and abandonment of the budget repair line. The spending dogs are off the leash.

New spending includes aged care. That’s been clearly required since the Royal Commission into Aged Care Quality and Safety report. The only question was how much. To date the speculated figure is $10 billion over four years. At first blush this appears a large number, but it’s well short of the $7 billion the Grattan Institute says is needed (and other commentators put the figure even higher). So it might be more come budget night.

To that we can add $1.7 billion for childcare, personal income tax cuts, mental health funding, spending on natural disaster resilience, and tax cuts for brewers and distillers. Michael McCormack, the Nationals leader and deputy prime minister, announced more regional grants — possibly included in forward estimates.

Similarly it is not clear whether $747 million for Northern Territory Defence base upgrades is an addition to the existing Defence budget or a reallocation. If it is additional money, it will be announced on budget night. Other areas of new spending are likely to include climate change technology projects, boosting the vaccine rollout, and new or expanded quarantine facilities.

An austerity budget this isn’t.

That’s the right approach at present. Financially Australia is considered a safe bet, even more so off the back of our success in containing COVID-19. The world is happy to lend us money at derisorily low interest rates. If there are needs, the Australian budget has the capacity for spending to address them.

Debt is rising as a consequence, to a level that would have caused shock and outrage before COVID. As the last budget showed, it’s hardly a worry at all today.

Supporting employment is a more important economic priority. We see this in the government’s fiscal strategy, which has to be made public (a charter of budget honesty requirement). Frydenberg’s recently announced economic strategy of supporting the economy “until the unemployment rate is comfortably back under 6%” is already out of date, and we will see an update on budget night. The new target is below 5%. It’s a massive change from past budget strategies that focused on fiscal restraint.

Most economists look at the budget bottom line, including the totals for spending and revenue, and no deeper. Most industry and community lobby groups examine their areas of concern, whether they have received a handout or not. By these measures, the budget is likely to be received positively.

Where the commentary fails is in examining what the budget does not contain.

The raft of new election spending will give an immediate rush of excitement to areas it targets. It won’t help raise living standards over the long term — for that we need to address stagnant productivity, housing affordability and climate change.

For productivity to grow we need innovation and education — not only fixing our failing university funding system, but investments across the span of education, from early years, schooling and vocational education.

The recently announced $1.7 billion increase in funding for childcare was aimed squarely at workforce participation. The objective was assistance for parents (especially women), not improving children’s learning. Assistance in their early years helps set kids up better for learning throughout life. Reflecting the short-term nature of politics, this has barely been mentioned by either the government or opposition. Hopefully this benefit will flow regardless.

Other areas to improve productivity could include vocational skills training, communications infrastructure, regulation working more effectively, help for businesses to fail and move on. They are difficult and long term, so outside the scope of a pre-election budget.

Same goes for climate change. The government has apparently calculated it will never win over committed environmentalists who want serious action, so needs to do only enough to retain support from the “at least they are doing something” brigade.

So while the budget will at a macro level hit the right notes, based on information we have so far it appears it won’t deal with difficult long-term challenges. We will need to wait for an opportune post-election budget.

Stephen Bartos is a former deputy secretary of the Department of Finance and a regular contributor to The Mandarin and Crikey.