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Heroic assumptions in budget omit one major threat: a global debt crunch

The main challenge – the “known unknown”, to borrow from former US defence secretary Donald Rumsfeld – is just how our economy will transition from direct wage support provided by JobKeeper, presently supporting the wages of some 3.5 million workers, or more than a quarter of the workforce, to indirect support through personal tax cuts and various business incentives.

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The budget assumes JobKeeper will be phased out by next March, even though there is still considerable debate about whether this will indeed be possible. The government also still resists a commitment to JobSeeker beyond the end of this year, although it does introduce a subsidy for business to hire younger unemployed people, admitting they are particularly hurt by the recession.

Behind all this are some pretty heroic assumptions about how the virus will behave – specifically, that localised outbreaks will be contained, that Victoria’s restrictions are brought back in line with other states by year’s end, by which time state border restrictions will also be lifted (except Western Australia’s, which would wait until April 1), that a COVID-19 vaccination program is fully in place by late next year, and that international students and permanent migrants will return gradually through the latter part of 2021, along with low levels of international tourism.

We saw just how quickly similar assumptions in the July economic statement were negated by Victoria’s second wave of the virus.

The other key assumption is the significant collapse in budget revenue will be restored as growth returns, and most of the spending measures are “temporary” and easily reversible. This certainly is not clear, as “benefits” given can soon become “rights”, especially if the virus doesn’t behave as assumed and confidence isn’t restored as predicted.

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Although Frydenberg was quick to point out our “better” economic performance compared with a number of other developed economies, the budget downplays the risks of the state of the global economy in assessing our prospects. For example, it assumes virtually a V-shaped recovery for the global economy: India from minus-9 per cent growth in 2020 to plus-9 per cent in 2021, Europe from -9 to +3.5 per cent, our major trading partners – -3 to +5.3 and 4 per cent, the world from -4.5 to +5 per cent.

Similarly, while the blowout in our debt-to-GDP ratio is alarming relative to previous expectations and government posturing about debt and deficit disasters, we are assured that ours is “low” by global standards – half the United Kingdom’s, a third of the United States’ and a quarter of Japan’s. We are also assured this debt is affordable, given our AAA credit rating, and with global interest rates so low, and likely to remain so. Indeed, it has been pointed out that the likely interest cost of our prospective debt is still less than it was in 2018-19.

However, it is an inherent weakness of global COVID-19 economic strategies to ignore possible longer-term consequences of massive monetary expansions by central banks (now totaling some US$7.3 trillion, according to the International Monetary Fund) and fiscal expansions by governments. Pre-COVID global debts totalled more than 225 per cent of world GDP, with the IMF predicting the median debt-to-GDP ratio to have increased by 17 per cent in advanced economies, 12 per cent in emerging economies, and 8 per cent in low-income countries by next year.

In these terms, the possibility of a pandemic-induced systemic debt crisis cannot be ruled out – a situation compounded by bubbles in many stock and property markets, all threatening stability in bond and currency markets.

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Finally, the budget was devoid of any genuine reform, or a recovery reset. The initiatives regarding manufacturing and areas such as waste and climate are modest, and lacking in detail. The tax changes fall far short of reform in a tax system that is inefficient, inequitable, complex and riddled with many structural weaknesses. So too, with the lack of reform with vocational training, research, and higher education initiatives –and with aged and child care yet to come.

The budget has squandered the opportunity to seize the moment and set out a framework for the inevitable transition to a low-carbon Australia by mid-century, sector-by-sector.

John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.

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