Out of all events in the Australian political calendar, the Federal budget is rarely the pivotal moment in an average person’s voting habits. This is understandable. To fully comprehend any sort of nation-wide and long-term piece of economic policy – let alone a Federal budget – requires a considerable investment of time and research that many outside of academia or economics-related professions do not have. Furthermore, reporting and coverage in the mainstream media often gives us a shallow understanding the complexities at hand. However, budgets are a critical part of a government’s blueprint for the short to long term, outlining a national direction and plans for the machinery of government. Budgets have the power to make or break a nation’s economy –particularly on the eve of an economic downturn.
To analyse the 2019-20 Federal budget, one should look into the economic conditions and probable future of the Australian economy. On the surface, Australia has had a fortunate run of economic prosperity for nearly 30 years. Continual economic growth has seen unprecedented development relative to the OECD – that would lure one to believe that Australia’s economic future is no serious cause for concern. The economy’s uncanny ability to miss financial earthquakes like the GFC has restrained many from considering less pleasant alternatives. Unfortunately, the actual predicted outcome is not so bright. More economists are expecting a major downturn in the economy to occur as soon as 2019. Many of these forecasts are steeped in an understanding of the dangerous levels of household and corporate debt in Australia that have long been incubating.
Without getting too technical, it is worth outlining the exact mechanisms by which debt can hinder an economical performance. Economic activity to grow an economy comes from several sources, such as consumer spending, investment by individuals and businesses, and, in some cases, government policy. The former two are common ways economies grow on the private side of the economy – through consumers spending more on goods and services, and businesses driving development and expanding operations through investment. Often, these groups need to take out loans from financial intermediaries (banks) to properly and safely finance their activities, in the process creating a debt – in this case, private debt if the borrower is not government affiliated. Thus, debt is often a natural by-product of a growing or booming economy. As history professor, Yuval Noah Harari has pointed out, the idea and process of debt have been a fundamental part of allowing economic growth and development in areas from science to technology. By representing imaginary goods or gains on future investment as credits (or debt), institutions and individuals can more confidently lend to the borrower to undertake entrepreneurial and economic activity essential to an economy’s growth, paying the borrower as stipulated in the terms of this debt.
Problems arise, however, when this level of debt is left unchecked and grows out of control. Numerous models show that when individuals or firms have a strong tendency to invest, the level of private debt in an economy begins to rapidly increase relative to GDP (i.e. the debt to GDP ratio increases). This can easily be passed off as economic growth, since debt is often used to power economic activity and, as debt to GDP increases, the percentage of GDP debt also increases. Just before a crisis, volatility in unemployment ceases, giving the impression of economic tranquillity. Critical mass –when the economy’s GDP and employment crash to zero – occurs when this debt growth begins to slow down, resulting in a potentially cataclysmic economic crash.
In Australia, we are close to hitting this critical mass of debt. Since 1995, debt to GDP has skyrocketed from 120 per cent to 210 per cent in 2015. Most worryingly, this ratio has begun its decline since then, dropping to 205 per cent in 2017, signalling the approach of critical mass. If no policy action is taken, the only way out of this situation for the near future would be an impossible increase in household borrowing. This would make total private debt nearly 250 per cent of GDP, which would be the highest level ever recorded in the OECD. Given this, it is likely an unavoidable economic slowdown is on the cards.
Returning to the original question at hand: does this budget have what it takes to mitigate the worst of a hypothetical but probable crisis? As a short-term measure, the budget has sound and robust policies at its disposal. During any kind of economic calamity or financial crash, it is imperative that the government ensures that the economic activity continues. The tax cuts proposed in the budget are one such stimulating measure: $158 million worth of tax relief has a high chance of increasing the spending of consumers, particularly those in lower socio-economic levels who stand to gain up to an extra $1080 annually in income. Furthermore, plans for extensive investment into essential infrastructure is a sure-fire way to keep the economy ticking over in a recession, as demonstrated by Roosevelt’s Works Progress Administration in the 1930s. The promised $2.6 billion will largely contribute to regional and urban road upgrades and construction. This on top of further funding for upgrading telecommunications in regional and rural areas will likely help to create jobs in a hypothetical contracting economy, and may help to stabilise and stimulate economic demand, particularly in these centres.
But aside from these measures, the budget fundamentally does not seem equipped to deal with the possibility of a recession. Many of the underlying assumptions that are used to justify budgetary spending or restraint are highly unrealistic. For example, an assumption of a 0.4 per cent growth in health spending in real terms is improbable given the retirement of the boomer generation and increased strain on health systems this brings. The defence has received a similar projection for its expected unlikely growth, since such departments often need huge amounts of funding to achieve their policy goals. The budget is constructed in a way to discourage further spending; effectively limiting the scope of government policy for the near future. Overall this budget is one of restraint and prudence, taking the title for the lowest projected spending in the past 50 years. While in normal economic times this stance is welcomed, in the lead-up or during a recession it is not the right mindset to have. Such assumptions will have to be violated for the government to help restart the economy through spending, such as once-off lump sum payments to consumers or businesses, or increased spending on public works, and further tax cuts. Otherwise, non-intervention for the sake of sticking to budgetary goals will likely make the situation worse. It is clear from the nature of the budget that some policymakers do not anticipate a recession despite the growing evidence and support for this viewpoint. Even if a recession does not originate in Australia, growing economic woes in the US or elsewhere could easily create a chain reaction effect, much like in the GFC, that could severely damage the unprepared Australian economy.
While it is easy to criticise a budget for its lack of preparation, one must remember these are highly politicised documents, and they often shirk economic truth for the purposes of political warfare. Economic predictions can be lost in the desire to one-up a political opponent; most if not all political parties are guilty of this, both in Australia and across the globe. Nonetheless, it is important to realise such faults and make alternate suggestions from an economic perspective. Investment in infrastructure and tax cuts are solid short-term measures, but these alone will not be enough. Longer-term investments that pay for themselves, such as investments into increasing economic productivity and technology, are all incredibly powerful ways to stimulate short-term and long-term growth well after a crisis has subsided. Even better, ways that tackle the heart of the problem, like gargantuan levels of private debt, are a promising way to delay or avert the crisis before it begins. History has shown us time and again that poor governmental policy in the face of recession – be it in the Great Depression, the EU crisis (specifically Greece, Ireland and Cyprus) and the GFC – only makes the situation far worse. Australia has weathered crises before, and with sensible and diligent policy-makers in government, business and banking, we can weather it again.