Advertisement

Liberals drop debt and deficit rhetoric to prioritise job creation

<span>Photograph: Lukas Coch/AAP</span>
Photograph: Lukas Coch/AAP

The Morrison government will prioritise reducing the unemployment rate ahead of debt reduction in a significant overhaul of its fiscal strategy in response to the coronavirus-caused recession.

In a major shift away from the Abbott-era hyperbolic rhetoric of “budget emergencies” and “deficit disasters”, treasurer Josh Frydenberg said on Thursday the government would not begin the work of substantial debt and deficit reduction until the unemployment rate was “comfortably” back under 6%.

“With historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP — provided the economy is growing steadily,” Frydenberg said.

“Even though debt will be at much higher levels than we are accustomed to, it remains sustainable and will be put back on a steady path of reduction.”

Related: Hospitality jobs have taken a hammering. Opening Australia's state borders will not be enough | Greg Jericho

Thursday’s speech is a significant pointer to the budget on 6 October. The government is expected to bring forward income tax cuts, provide further support to businesses, unleash significant spending on infrastructure, and help Australians into jobs, as cuts to income support through the jobseeker and jobkeeper payments will be made at the end of September.

Frydenberg said if the government implemented austerity policies now in order to deal with substantial deficit and debt accumulated during the crisis, it would be “damaging to the economy and unrealistic to target surpluses over the forward estimates – given what this would require us to do in terms of significant increases in taxes and large cuts to essential services”.

“This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position.”

Frydenberg said the government’s priority now was to restore confidence after the economic shock associated with the pandemic, and that required a new fiscal strategy.

He said the strategy would involve allowing the automatic stabilisers to “work freely to support the economy” and continuing to provide “temporary, proportionate and targeted fiscal support, including through tax measures, to leverage private sector jobs and investment”.

The automatic stabilisers refer to cyclical fluctuations in the budget that occur in response to changes in the economy. During economic booms, tax collections increase and expenditure decreases, and during downturns the opposite occurs.

But Frydenberg said economic reform would be key to the government’s growth strategy. He flagged “structural reforms that position the economy for the jobs of the future and which improve the ease of doing business”.

Some government MPs have been concerned about the size of the fiscal intervention during the pandemic. Frydenberg will be under internal pressure to pursue substantial reforms, such as overhauling labour market regulations, and giving business incentives to boost investment.

Liberal MPs on Thursday cautiously welcomed the shift in fiscal strategy, but declared it needed to be accompanied by reform.

Sydney Liberal MP Jason Falinski said the treasurer had not abandoned the aim of debt reduction because “the fiscal strategy is to get aggregate demand on a sustainable path and once that’s happened we can go back to debt reduction”.

“It’s the paradox of saving – where you’re trying to get your debt reduced but by saving you increase the debt because aggregate demand collapses,” he said.

“There is no point collapsing your economy for the sake of having debt reduction if all you’re doing is putting the economy and debt back on an unsustainable path.”

Falinski said sustainable growth came from policies that “rebalance risk and reward”, nominating industrial relations, skills and taxation as a focus.

Senator Andrew Bragg also nominated taxation and labour law as policies that need to be “recalibrated to drive more private investment”.

Related: Paul Keating accuses Reserve Bank of not doing enough for Australia's economy in Covid recession

Bragg said the treasurer is “on the right track because we’ve had enormous shock so what we now need to do is grow to pay down the debt”. But the Coalition “hasn’t abandoned the medium-term focus to run a balanced budget”.

The Queensland Liberal Andrew Laming said the shift in fiscal strategy was “very significant”, describing it as “the first time” the Coalition had “definitively” put the goal of fuller employment above reducing debt.

The “historic” reordering of priorities “is almost a diluted version of Modern Monetary Theory, a belief that the true crime is to leave the citizenry unutilised or underutilised”, he said.

“It’s an ideological shift in the Coalition partly forced on us by Covid ... That if we cut services and insist on lowering debt, we are punishing the current generation for the excesses of those that came before.”