Christopher Niesche: Australia faces most important Budget since end of WWII

Australia treasurer Josh Frydenberg faces the toughest week of is career. Photo / Getty Images

When Treasurer Josh Frydenberg stands at the dispatch box in the House of Representatives on Tuesday night, he will deliver what is arguably the most important Australian Budget since the end of the World War II.

He will try to pull Australia out of the coronavirus-induced recession with stimulus on a huge scale, tax cuts and spending increases.

It's a huge turnaround in policy from the past decade, where Prime Minister Scott Morrison and other Liberal Party leaders have staked their economic credibility on producing a budget surplus, even when the sluggish economy could have done with a bit of help from more government spending.

Just because it's a huge turnaround doesn't mean it's the wrong thing to do.
To try to rush a return to surplus would risk strangling any economic recovery, unnecessarily prolonging economic hardship for hundreds of thousands if not millions of Australians.

We can expect a business investment allowance to encourage companies to invest and an accelerated personal income tax cut. It will also speed up planned infrastructure spending.

The other priority will be spending on skills and spending to turn around Australia's poorly-performing vocational education and training sector.

One thing the government won't attempt is any macroeconomic reform. Australia desperately needs to boost its productivity, but it won't happen in this budget.
There will only be tweaks, such as some increase in workplace flexibility.

To increase the flow of credit, the government will axing responsible lending laws to encourage banks to lend. The current one-size-fits-all lending rules are too restrictive, the Government says, and banks will now have more scope to take into account individual borrowers' circumstances and the sort of loan they want.

It sounds good in theory, but comes with huge risks – we've all seen recently how Australian banks behave when they're given a free hand. We could end up seeing a lot of distressed borrowers who should never have been given loans.

The government will also introduce US-style insolvency rules for small business.
Small businesses with debts of up to A$1 million will be able to seek advice from an insolvency practitioner on developing a restructuring plan.

The business will then have 20 days to develop the plan, which would include restructuring debt and preparing a case for creditors to consider.

The creditors will have another 15 days to vote on the plan, during which the business can continue to trade. It's a change from the current regime where business owners effectively lose control of their business and an administrator takes over.

New Zealand has already introduced similar – but only temporary – measures to help companies manage the impact of the Covid-19 crisis.

These reforms are really only tweaks. In terms of major structural reform to the economy, the government has kicked the can down the road for the years ahead. It's little surprise, as Morrison had shown little interest in reform even in better times.

The pressure is on to pull Australia out of a deep recession. Photo / Getty Images

The main game in the budget will be stimulus spending and the huge resulting deficit.
The economy is on track for a record A$225 billion deficit in the current financial year with a return to surplus looking years away.

The government says it won't start trying to get the budget into surplus until the unemployment rate is "comfortably" below 6 per cent.

According to a survey of economists by the Australian Financial Review, the jobless rate will rise to 8 per cent by year-end, and to sit at 7.9 per cent at June 2021. So a return to surplus won't happen any time soon.

In fact, the economists expect it to be a decade before the Budget is in surplus again.
Thankfully the government has given up on pursuing surpluses, a policy that was more of a political weapon to show its economic responsibility compared with what it said was Labor's poor economic management.

In making the unemployment rate its primary economic target, the government is putting people before politics, which of course is what governments should always do, but often don't.

The economy will need all the support it can get, particularly with the GDP-withering effect of the second lockdown in Victoria. There will be no V-shaped recovery.

Economists expect a 4 per cent GDP contraction for the 2020 calendar year, a contraction of 2.2 per cent by June 2021, and growth of 2.6 per cent by the end of the 2021 calendar year.

At some point, this or a future government will need to dial back the spending and start reducing government deficits and paying back the debt.

The easiest way to do this is through a strongly growing economy where more activity leads to a higher tax take and the debt shrinks as a proportion of the economy as the GDP expands.

By spending and supporting the economy, Fydenberg's Budget will give us the best chance of doing this.