Frydenberg’s Budget Is A Spendathon, But Is It Any Good?

 - April 1

The government’s much-anticipated 2022-23 Budget contains the usual set of massive spending programs characteristic of an election year.

Many of these are warranted and arguably long overdue – such as the nearly $10 billion set aside to increase intelligence and cybersecurity capabilities (though this will only be realised over the course of a decade). However, most are largely political in nature, as the Opposition correctly asserts.

The key theme of the Treasurer’s Budget announcement on Tuesday night was alleviating cost of living pressures for Australians. But going on a cash splurge is not how to do it.

A government that is serious about addressing the long-term cost of living pressure facing everyday Australians would reign in its spending; not spend more, since continuously spending public money contributes to cost of living going through the roof.

The rise in the price of oil from Russia’s invasion of Ukraine is only one factor driving up cost of living. Others include the skyrocketing cost of housing, business costs associated with switching to renewables, increasing compliance costs due to red tape, and the government’s very enthusiastic use of fiscal stimulus to dampen the economic impacts of the pandemic – among other factors – also contribute to prices of goods and services going up.

Australian governments, since the end of the Howard era, have been ready to adopt a Keynesian response to economic downturns. Simply put, they are prepared to spend their way out of a slump. We’ve seen this in action through the Rudd government’s $42 billion Nation Building – Economic Stimulus Plan rolled out to weather the 2008 Global Financial Crisis. The current government’s $311 billion economic support is designed to get Australia through the Covid pandemic, but whatever one’s opinion is about the wisdom of this particular school of economics, the Keynesian approach is not just about spending money…

The notion that governments should continue to spend other people’s money, come rain, hail, or storm, until it’s all gone is not actually Keynesian – it’s socialism. Keynes advocated Treasury’s assistance in addressing issues associated with fluctuations in the business cycle. Yes, this translates to an expansionary fiscal policy when times are tough, but it also calls for tightening the belt when the economy is doing well and chugging along, so as to not overheat the market and worsen inflationary pressures. In other words, governments should stop their spending spree if they are to slow down escalating pressures on people’s cost of living.

Australia’s seasonally adjusted unemployment rate has now fallen to its lowest level in 13 years – down to 4 per cent (according to the latest data by the Australian Bureau of Statistics). It is expected to go even lower in the coming months. By the end of the year, unemployment will reach the lowest level in 50 years. We are virtually at full employment. Any additional injection of cash in the economy will only drive prices further up. Lowering fuel excise and giving cash handouts does not magically increase the supply of oil. Neither do these measures impact the supply of other commodities that we are increasingly finding more expensive.

The impact will necessarily be an upward pressure on inflation, which the Reserve Bank has a duty to combat – through increasing interest rates. In essence, what you receive from the Treasurer on Tuesday night will have to paid back through higher inflation or a higher interest rate on your mortgage.

Australia would be much better off using this opportunity to focus on balancing the books with the aim to reduce ballooning government debt, which currently is fast approaching $1.5 trillion. Any measure aimed at further expanding the Australian economy should focus on the supply side of the equation and be aimed at increasing productivity. This includes slashing red tape, incentivising investments and innovation, and getting rid of the government’s 2050 Net Zero commitment, which is set to do considerable damage to the mining and energy sectors which form the backbone of our economy.