I want to share with you the two best pieces of analysis about the 2021-22 federal budget delivered last night by Treasurer Josh Frydenberg.
The first is from the editorial in yesterday’s The Australian Financial Review which argued that:
The age of entitlement, declared dead in Joe Hockey’s 2014 budget, is very much alive and well in this one. It is disappointing that Mr Frydenberg is taking such a casual approach to deficit reduction, leaving it to its own devices. But it has been even more disappointing that the government has been so reluctant to spend any of its own political capital in supply-side reforms to tax, workplace relations, and energy policy that would make new public and private money work better.
This is exactly what the Institute of Public Affairs identified in our analysis of the budget which we released less than 30 minutes after Josh Frydnberg had finished speaking on Tuesday evening. In that analysis, I said that “the age of entitlement is back” and that “this is a budget that Labor would have been proud to deliver” because it “commits Australia to permanently higher spending, higher taxes, and higher debt, without offering any economic reform.”
With the benefit of hindsight, I would go a bit further and say that it is even worse than that because Labor at least would have been constrained by rhetorical opposition from the Coalition about debt and deficits. Now, both sides of politics are committed to higher taxes and more spending.
The second best piece of analysis is from Terry McCrann in yesterday’s Herald Sun. I could block quote the entire piece because it is that good. But the most important observation Terry makes is in relation to debt:
If it’s OK for someone to borrow a million at a 2 per cent interest rate to buy a house, surely it’s even better for a treasurer to borrow a trillion even cheaper at just 1 per cent? Until rates go up. The budget fine print assumes we’ll be paying just $17bn of interest on that $981bn of debt in 2024-25. That’s an interest rate of just 2 per cent.
Terry also asks “What if it’s 6 per cent? Suddenly that’s another $40bn on the deficit, every year.”
As it so happens, IPA Research Fellows Kurt Wallace and Cian Hussey modelled that exact scenario in a research report that was released earlier this year. Kurt and Cian developed an economic model to estimate the economic and financial impact of interest rates rising to 4 per cent and 6 per cent. They found that under the 6 per cent scenario interest payments on debt would increase from the current amount of $17.1 billion to $64 billion by the year 2030.
This would mean that interest payments on federal government debt alone would become the third-highest expenditure item in the federal budget by the end of the decade, behind expenditure on health care and income support for seniors.
Kurt and Cian were also the first in Australia to estimate that federal government debt would reach one trillion dollars in modelling the IPA released in April of last year.
Rapidly increasing interest rates is not a far-fetched scenario. Even the budget acknowledges that borrowing costs for the government have doubled since just October last year. And the RBA’s inflation expectations are at their highest level since 2015.
This shows that everything IPA executive direcctor John Roskam identified in his column in The Australian Financial Review last Friday was correct. John was the first to make the astute observation that:
It’s not immediately obvious how next week’s federal budget from the Morrison government will be much different from one that would have been delivered by a Shorten government or might be delivered this time next year by a possible Albanese or Plibersek or Chalmers government.
This observation is now beyond debate.
As Terry McCrann concluded, “I repeat what I wrote a year ago: we will never again see a federal budget surplus. Last night made that a certainty. We will also never see another generalised tax cut, after the last round from 2019 arrives.”
This is why the age of entitlement is back. And the era of reform is over.
Whereas the spending increases in the budget are significant and permanent – such as to child care and welfare – the tax relief is small and temporary. The best the government could do is extend the modest low and middle-income tax offset by just one year. According to the Treasury, this will increase GDP by around $4.5 billion and help create an additional 20,000 jobs. If the policy is as good as claimed, it is unclear why it isn’t made permanent.
Regardless, any form of tax relief is illusory because the government is committing to raising taxes in the future via a massive expansion of debt. Sustainable and permanent income tax cuts will only be the product of a sustainable and permanent reduction to the size of government.
Total federal government debt is now just shy of $1 trillion, and will cross that threshold for the first time in our nation’s history sometime in the next 12-18 months. One trillion dollars of debt is the equivalent to 50 per cent of GDP, which is more than double what it was during the Whitlam era. And it represents $37,500 for every person in Australia, which is a staggering 1,300 per cent increase since the eve of the Global Financial Crisis.
This will all need to be paid back by not only our children, but our children’s grandchildren.
It would perhaps be understandable, even desirable, if debt was being invested in productive assets that deliver long-term benefits to future generations, such as constructing more dams, coal-fired power, or nuclear power. But instead the government is borrowing money to subsidise child care for high-income, inner-city lawyers and doctors.
One aspect of the budget that has not been widely discussed is how exactly this debt will be paid back. The government has no stated plan because it has not committed to attaining a surplus. Revealingly, the word ‘surplus’ was not mentioned even once in the Treasurer’s speech.
The temptation for a future Coalition or Labor government will be to avoid tax hikes and seek to inflate the debt away. This is what has happened so far.
Since just January 2020, the Reserve Bank of Australia’s total assets have increased by 139% from $177 billion to $423 billion. In simple terms this means that the RBA is buying government debt by printing more money (the RBA typically buys government debt indirectly through purchasing the debt from commercial banks, but the effect is the same). This has the effect of increasing the supply of money in the economy, which increases inflationary pressures.
It may be tempting for the government to suppose that it can keep debt under control through modest rates of inflation. However, history shows that once inflation begins to increase, it is very difficult to bring it under control. One of the only mechanisms is to increase interest rates to reduce the money supply and in doing so dampen economic activity and risk a repeat of the Keating recession.
Despite all of this, the Budget has been positively received by the public at large. The key question is: What does this say about Australia and our future? To me, there are three things.
The first is that we are living in the age of emergencies — climate emergency, Covid emergency, emergency stimulus — where public expectations of government have changed significantly. Changing expectations is not a new phenomenon. But it has been vivified and accelerated by the events of the last 12 months. Australians now expect their government to protect them from every conceivable economic, social, and health risk.
What we used to do for ourselves and our families and communities we now look to government to do for us. This has had the effect of undermining civil society – such as local sports clubs, RSLs, religious organisations, unions and other workers groups – which in turn has deprived Australians of the dignity and meaning that comes with voluntarily undertaking good works to help our neighbours and the less fortunate.
Secondly, it shows that we cannot rely on politicians to make the case for freedom or smaller government. Perhaps a part of being “the lucky country” was having at least a handful of politicians, such as Peter Costello, who helped ensure that Argentina’s fate was not Australia’s.
But it now falls to all of us to continue the argument and the debate. It begins by recognising that smaller government is not an end in itself, but a means to an end to attain greater freedom and more control over our own lives. To make it easier to start a small business, raise a family, and own our own home. The Australian dream is a product of our agency and actions. It isn’t a gift from government.
Finally, it shows how important it is to engage in the battle of ideas. It is fashionable in some sections of the media to deride those who are consistent and principled (sometimes called “ideologues”) as being impractical. But there is nothing practical about borrowing massive sums of money without any plan to ever pay it back. Being ideological is practical.
The Coalition long ago withdrew from the battle of ideas when it came to culture. On issues from freedom of speech, to freedom of religion, to the rule of law, and to climate change, the Coalition has allowed the basic contours of the debate to be defined by the left (for example, implementing a net zero emissions target is now just a matter of how and when, not if.)
Having ceded the cultural ground to the left, they have now ceded the economic ground, too. Almost no one from the Coalition engages in debates about what is and isn’t appropriate for the government to do. Or about whether Australian taxpayers are better placed to spend their own money than politicians and bureaucrats. Or how being on permanent welfare payments is dehumanising and undignified, and that work is the best form of welfare.