Josh Frydenberg’s 2021-22 budget locks Australia deep into the red for years to come with large deficits out to 2024-25, fuelled by increased spending that will permanently enlarge the role of government in Australia.
Frydenberg will run up a deficit of more than $100 billion next financial year, and a similar deficit the following year, despite the economy growing at over 4% and unemployment falling to 5% — all in the quest, he says, to push unemployment below where it was when the pandemic struck.
Treasury’s forecasts anticipate that to happen in 2022-23, when unemployment will fall to 4.75% before heading to 4.5% after that. While that would represent the tightest labour market since before the financial crisis, it still will do little to fuel wages growth: the government sees the Wage Price Index (WPI) only reaching 2.75% by 2025.
This means a real wage cut for Australian workers next year, and no real wages growth until 2025 when inflation will reach 2.5%. Australia’s net debt will rise to nearly one trillion dollars by 2025, despite the lower-than-forecast deficit this current financial year.
The government’s big spending will replace an absent business sector: in last year’s budget and again in the Mid-Year Economic and Fiscal Outlook (MYEFO) in December, the government confidently expected non-mining investment to hit 7.5% in 2021-22, but now says it expects growth of just 1.5%.
The government’s new spending is heavily skewed to the health and care sector, with a $17 billion-plus package of aged care spending as part of its response to the aged care royal commission; a $2 billion mental health package and a $6 billion infrastructure package. Much of the funding in aged care and mental health is permanent, while the government has also continued its low- and middle-income tax offset, the “temporary” tax cut that the government is unable to end.
In a budget with plenty of winners and few losers, the politics are all in the government’s favour — even if it represents a comprehensive abandonment of the debt ‘n’ deficits mantra that has been central to Liberal identity for a generation.