Federal Budget Marks a Shift to the Left

Federal Budget Marks a Shift to the Left

The announcement of the Morrison government’s federal budget last Tuesday marks a significant
shift in the conventional wisdom of Australian politics. For years, both Liberal and Labor
governments have been chiefly preoccupied with the issue of debt accumulation, and often
shirked large-scale public investment for fearing of running the budget into deficit [1]. Indeed,
most prominent political leaders of the last 50 years have defined sound economic management
as returning the budget to surplus, and paying down the interest on the national debt [2].
However, Morrison’s so-called “recovery budget” makes little effort to achieve either of these two
objectives. Instead, Morrison has embarked on an ambitious fiscal policy agenda, a major
departure from Liberal governments of the past.


To put this most recent federal budget, into context it is important to consider Australia’s recent
political history. Since the Howard era, the Liberal Party has established a strong track record of
supporting fiscally conservative economic policies. For example, in the midst of the Global
Financial Crisis, the Liberal Party opposed the Rudd government’s $42 billion stimulus package
on the grounds that it was too big, and would saddle future generations with billions in debt [3].
Then, in 2014, the newly-elected Abbott government handed down a federal budget, which put
significant welfare reforms on the table, in order to reduce the deficit [4]. Given these two
particular cases, the Liberal Party’s 2021 federal budget would appear to contradict years of
rhetoric on the issues of debt and deficits.


Of course, while the 2021 budget represents a major departure from Liberal Party ideology, few
are likely to question the impetus for this budget spendathon. The COVID-19 pandemic ravaged
the economy in 2020, plunging Australia into its first recession in nearly 30 years with
unemployment peaking at 7.5% last July [5]. Over a year later, while Australia is certainly on its
path to recovery, the economy still faces significant challenges. With monetary policy largely
exhausted and international borders not expected to reopen until 2022, the government had no
other choice but to spend big in order to guarantee a V-shaped recovery [6].


In looking at the details of the 2021 budget, it is clear that the government has two main
objectives; (1) drive down unemployment to stimulate wage growth and (2) support those hardest
hit by the pandemic [7]. On both fronts, the budget delivers. The government has allocated $15.2
billion to infrastructure projects, $500 million to the jobtrainer fund and $1.2 billion to the aviation
and tourism industries; as part of an effort to get unemployment to 4.5% by 2025 [8]. In
supporting those most vulnerable members of society, the government announced the rollout of a
$17.7 billion aged care package as well as an extension of the low and middle income tax offset
[9]. A $1.7 billion childcare package also promises to increase the subsidies available for lowincome families [10].


On the whole, these new spending initiatives reflect a sound understanding of Australia’s current
economic issues. Unemployment must continue to fall, even below pre-pandemic levels, so as to
apply upwards pressure on wages, which only increased by 1.4% in 2020 [11]. In areas such as
taxation and childcare, the government has attempted to support the most vulnerable members
of society, whose circumstances have only worsened during the pandemic. For example, the
government’s increase in the childcare subsidy for families with two or more children is expected
to save approximately 250,000 Australian families an average of $2,260 per year [12].


In this way, the Liberal Party seems to have re-defined its view of government. While previous
Liberal leaders have spoken of “belt tightening” and the need to keep government expenditures
under control, Morrison has offered a different view by prioritising wage growth and living
standards. Through significant investments in infrastructure, childcare and healthcare, Morrison
hopes to well-exceed the levels of the pre-pandemic economy.


Although Morrison has embraced new economic priorities, the dual issues of debt and deficits
remain. The budget deficit, reported at $161 billion, is far better than the figure of $191 billion that
was anticipated last December [13]. However, government forecasts do not expect a surplus by
the end of the forward estimates, court years from now. What is more, Australia’s national debt
will only continue to climb, and is expected to peak at nearly $1.2 trillion in 2025 [14]. The costs
associated with a high proportion of national debt are widely understood; burgeoning interest
payments usually come at the cost of economic growth.


While these concerns are certainly understandable, it is important to consider some mitigating
factors. Firstly, the RBA has indicated that the cash rate will be set at 0.1% for at least the next
three years, meaning interest repayments on the national debt will remain low and stable [15].
Secondly, Australia’s economic recovery is still very much in its early stages. A significant increase
in tax revenues over the next year and beyond is likely as international borders reopen and
Australia is able to return to normal economic, political and social conditions. This would improve
the budget balance and reduce the deficit to a more sustainable level without the need for largescale spending cuts.


Although there will certainly be long-term costs associated with the 2021 budget, it not doubt
reflects a significant turning point in contemporary political thought. For the first time, the Liberal
Party has seemingly abandoned a more fiscally conservative approach and the rhetoric of “belt
tightening” in favour of reasonable public investment. As Australia emerges from the COVID-19
pandemic, the Morrison’s view of government has been to support those most vulnerable
members of society, as part of the economic recovery. This is reflected in the 2021 budget’s new
spending initiatives, particularly in areas such as aged care, infrastructure and taxation. Ultimately,
time will tell whether this shift in economic policy will be ingrained within Liberal Party orthodoxy,
or be reduced to a simple flash in the pan.
References
[1] Verrender, I. (2021, May 11). Budget 2021 debt and deficit departs from the Coalition’s small
government beliefs. ABC News.
https://www.abc.net.au/news/2021-05-11/budget-2021-could-signal-coalition-ideological-shift/
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[2] Verrender, I. (2021, May 11). Budget 2021 debt and deficit departs from the Coalition’s small
government beliefs. ABC News.
https://www.abc.net.au/news/2021-05-11/budget-2021-could-signal-coalition-ideological-shift/
13339320
[3] Grubel, J. (2009, February 12). Australia parliament rejects stimulus plan. Reuters.
https://www.reuters.com/article/us-australia-stimulus-idUSTRE51B2VL20090212
[4] Griffiths, E. (2014, May 13). Budget 2014: No pain, no gain as Treasurer Joe Hockey slashes
spending in ‘budget repair’ job. ABC News.
https://www.abc.net.au/news/2014-05-13/budget-2014-joe-hockey-slashes-spending-in-budgetrepair-job/5446700?nw=
[5] Kwai, I. (2020, September 2). Australia’s First Recession in Decades Signals Tougher Times to
Come. The New York Times.
https://www.nytimes.com/2020/09/02/business/australia-recession.html
[6] Hutchens, G. (2020, November 2). The RBA has begun ‘quantitative easing’. What is it, and
how does it work? ABC News.
https://www.abc.net.au/news/2020-11-04/what-is-quantitative-easing-and-how-does-it-work/
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[7] Gergis, C. & Thirlwell, M. (2021, May 11). Budget 2021-22: Setting the Scene. Australian
Institute of Company Directors.
https://aicd.companydirectors.com.au/advocacy/chief-economist/budget-2021-22-setting-thescene
[8] Crowe, D. (2021, May 11). Intensive support: Budget to offer to retrain Australians in new skills.
The Sydney Morning Herald.
https://www.smh.com.au/politics/federal/intensive-support-budget-to-offer-to-retrain-australiansin-new-skills-20210510-p57qit.html
[9] Crowe, D. (2021, May 11). Intensive support: Budget to offer to retrain Australians in new skills.
The Sydney Morning Herald.
https://www.smh.com.au/politics/federal/intensive-support-budget-to-offer-to-retrain-australiansin-new-skills-20210510-p57qit.html
[10] Crowe, D. (2021, May 11). Intensive support: Budget to offer to retrain Australians in new
skills. The Sydney Morning Herald.
https://www.smh.com.au/politics/federal/intensive-support-budget-to-offer-to-retrain-australiansin-new-skills-20210510-p57qit.html
[11] Janda, M. & Pupazzoni, R. (2021, February 24). Wages growth stuck at record low as public
sector pay freezes, award delays bite. ABC News.
https://www.abc.net.au/news/2021-02-24/wage-price-index-abs/13187102
[12] Jovic, D. (2021, May 7). Budget 2021: Federal Government’s childcare reform a ‘targeted’ &
‘proportional’ investment, but for whom? Dynamic Business.
https://dynamicbusiness.com.au/topics/news/federal-government-childcare-reform.html
[13] Evans, J. (2021, May 11). Here’s your summary of the highlights in the 2021 federal budget.
ABC News.
https://www.abc.net.au/news/2021-05-11/federal-budget-2021-explainer/13339052
[14] Gailberger, J. (2021, May 19). Treasurer Josh Frydenberg opens up about Australia’s debt
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https://thewest.com.au/business/economy/treasurer-josh-frydenberg-opens-up-about-australiasdebt-recovery-c-2877295
[15] Cranston, M. (2021, February 2). RBA nails 0.1pc cash rate until 2024. Australian Financial
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