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Supply to survive

 

‘It is important to go to the supply side. Thatcher, Reagan, that's an inspiration. Supply side can actually help create and strengthen the economy and that is what we are determined to do, provide a boost to aggregate demand, where appropriate, but to encourage supply-side reform because that will be important to the recovery.’ Josh Frydenberg, National Press Club Address, 24 July 2020

‘You take inspiration from lots of different sources. I also take it from Howard and Costello. But the reality is that Thatcher and Regan cut red tape, cut taxes and delivered stronger economies.’ Josh Frydenberg, Insiders, 26 July 2020

At the National Press Club on 24 July 2020, Treasurer Josh Frydenberg noted that ‘not everyone is a Keynesian…’. Indeed, not everyone. But maybe Mr Frydenberg is, at least to the extent that he follows a line often attributed to John Maynard Keynes, ‘When the facts change, I change my mind.’

In 2020 as the Covid-19 pandemic raged globally, as Australia shut its borders and some states shut in their people, massive government income support was introduced. The government was a little slow coming to recognise the need for such measures. Once they had, they wanted the support rolled out as quickly as possible. Frydenberg, Scott Morrison and their colleagues recognised that a demand side boost was absolutely necessary to sustain economic activity. Sustaining that activity, keeping employees tied to their employers, was also needed to ensure the social fabric did not tear irreparably.

The government was uncomfortable, though, with this approach. Even as much of the previous five years of Coalition government had been spent trying to reposition away from the Hockey/Tony Abbott budget of 2014, Frydenberg did not want to give away the Liberal Party's reputation as a lower tax, lower spending party of government. Even if the reputation outpaces the reality of Coalition government budgetary management. The Treasurer, given his record of public comment, did seem to be articulating a position he genuinely held.

 

'Governments seem to assume each new disruption is an anomaly that will not be experienced again, at least not by the current governing generation. Demand side responses are extended, with an apparent assumption of a long period of stability before the next disruption.'

 

Just as Joe Hockey, Treasurer after the governments of Kevin Rudd and Julia Gillard, seemed to articulate a genuine view when he told us on budget night 2014, ‘The days of borrow and spend must come to an end.’ It was ‘time, for all of us, to contribute and build.’ Though Frydenberg speaks of taking inspiration from a lot of sources, he is not currently taking any from Joe Hockey circa 2014. Or from himself circa 2020.

Arguably the facts have changed. A global pandemic caused massive human, and so economic, disruption. Yet, the Treasurer notes in his budget speech on Tuesday night, ‘our recovery leads the world.’ Australian households have, aggregately, very high levels of savings. The household savings ratio to income was at 16 per cent at the end of 2021, more than double the average of the last decade. So, does the demand side of the economy really need further heating?

If he was uncomfortable about building an economic plan on demand side assistance in the early uncertainty of the pandemic, how is he so comfortable with ongoing record outlays given we now know the economy has held up well? What are the chances this further cash leads to inflationary pressure that devalues the cash itself in the short term and leads to the Reserve Bank raising rates, good for those savings but not for those with a mortgage?

It seems trite to say that the key ‘fact that’s changed’ is that there’s an election around the corner. But it’s hard to say what else might explain this change in emphasis. This year’s budget papers have, apparently, lost the normal table that sets out key spending and saving initiatives. Maybe because there are no key savings initiatives. Or at least to avoid the chance that, if there is, no one will know to complain of having lost something they had previously received from government.

Ronald Regan did, of course, run huge deficits, higher than his predecessor, Jimmy Carter. Just as Malcom Fraser ran deficits higher than Gough Whitlam. In Regan and Fraser’s cases the rate of new government spending declined during their time in office. Not so for the Coalition government after this budget.  Over the next four years, government spending, now at 27.2 per cent of GDP will fall to 26.3 per cent. That will still be higher than the 25.9 per cent of GDP Rudd and Wayne Swan were spending at the high-water mark of the Great Financial Crisis, or the 25.4 per cent rate when the Coalition took office a little less than a decade ago.

This comparison picks up a deeper, structural problem. As crises emerge, standard economic theory does demand proportionate demand side relief. Sometimes proportionate means enormous. Cash is needed in people’s pockets to keep economic activity occurring and injections into industries particularly hit by a disruption ensure sections of the economy will be able to continue to contribute after a shock.

But governments seem to assume each new disruption is an anomaly that will not be experienced again, at least not by the current governing generation. Demand side responses are extended, with an apparent assumption of a long period of stability before the next disruption, plenty of time to pay down the debt accrued and do the required supply side reforms that are more palatable when the economy is in good shape. Plenty of time.

Except that we all know there isn’t plenty of time. Our experience is that uncertainty in global affairs and economic systems means disruption is an increasing experience of the contemporary economy. Pushing out the demand side largess, and holding off on the supply side reform, only risks the government position to deal proportionally with the next disruption.

Not that we can expect the Labor opposition to make much of this. Especially after the last election, Labor is locked in the same dynamic of electioneering as the coalition. Be a small target, don’t scare the horses with ideas of reform. More than this, many on the left will find it difficult to criticise the government for a very traditional left wing style demand-side budget.

There is room to. Supply side issues might be said to include technological infrastructure transformation which will create efficiencies especially in light of green investment; greater opportunity for those presently excluded from participation; reform that creates stability and settles the cost structures in care sectors. These concerns are hinted at, but with no substantial reforms of their own the best argument in the air for the opposition seems to be that it’s not a ‘real’ budget, it won’t last past the election.

Even as Anthony Albanese might be right, that the budget will fade fast with ‘all the sincerity of a fake tan’, that might be the best we can hope for. Post-election policy might have to concede some of the short-term handouts. In making decisions about future expenditure, a government might draw on the momentary wisdom of Barnaby Joyce who suggested prior to the budget that the fuel excise should not be cut because it funds roads and other supply side necessities that someone has to pay for.

Joyce’s traditional Country Party approach obviously did not get up in the Coalition Cabinet, but the irony presented by his intervention won’t be the last time we wonder through the upcoming election how a politician arrived at a position given previous commitments expressed, no matter how authentically.

 

 


 

Julian ButlerJulian Butler SJ is a Jesuit undertaking formation for Catholic priesthood. He previously practiced law, and also has degrees in commerce and philosophy. Julian is a contributor at Jesuit Communications, a chaplain at Xavier College, and a board member at Jesuit Social Services.

Main image: Treasurer Josh Frydenberg delivers budget address. (Martin Ollman / Getty Images)

Topic tags: Julian Butler, Budget, AusPol, Economics

 

 

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Existing comments

A very fine and rare essay, worthy of a Jesuit educator, and one that graces these pages in terms of its detailed explanation of the complex politics and morality of managing the economy, which is about consistency and those who stray from it and who abandon 'first principles' at their risk in complex matters of supply and demand-side economics.

Kudos to you, Julian Butler and Eureka Street, for introducing a topic that is surely Julian's forte!


Michael Furtado | 14 April 2022