I completed an economics degree at Sydney University in 1966, along with classmate John Hewson, who was also studying "the dismal science". Hewson later became my boss as leader of the opposition in Canberra in the early 1990s.
When I entered the senate, I was surprised to learn that all that economic theory we had been taught in the mid-1960s (about Keynesian deficit financing) was passe. The new test of good government seemed to be to balance the federal budget.
MPs were sternly lectured in the Coalition party room by Peter Costello that national budgets were just like household budgets, and they had to be balanced. Immediately into my mind came the image of Charles Dickens' character Mr Micawber, with his principle: "annual income twenty pounds, expenditure twenty-one pounds equals misery, versus income twenty pounds, expenditure nineteen pounds equals happiness".
For the past 25 years, like Mr Micawber, we have had a national obsession with balancing the government books. This was the holy grail, which Tony Abbott used mercilessly to beat up the Rudd/Gillard government with his endless debt and deficit refrain. Government debt obviously equalled failure.
Australia came within a whisker of actually balancing the budget in January 2020. In preparation for this momentous event, the government commissioned black coffee mugs emblazoned with Back in the Black slogans. They are now collectors' items.
Such hubris was smashed within a month by the arrival of COVID-19. Suddenly, a Coalition government was forced to rediscover those old Keynesian economic truths. Countercyclical budget deficits are back in fashion during the recession.
What Australia is facing is not just any old garden variety government deficit like we had in the 1981-83 and 1992-95 economic downturns, but deficit levels not seen since we had to pay for our involvement in WWII.
The 2020-21 forecast budget deficit next week could be as high as $200billion, or 10 per cent of GDP. This will make the 'Beasley Blackhole" budget of $10billion in 1995 look like small change. Additionally, the forecast gross debt is expected to exceed 45 per cent of GDP, almost one trillion dollars.
So how will the government in 2020, use fiscal policy to get Australia out of its COVID-19 induced economic malaise?
The budget is supposed to be kept under wraps until the Treasurer speaks next week (Tuesday, October 6). However, the broad outline of how the government plans to help rebuild the national economy is becoming apparent.
In a speech to the Australian Chamber of Commerce and Industry (ACCI) last Thursday, Treasurer Josh Frydenberg revealed that Australia's 12-year-old "budget repair" strategy would be delayed. In the 2020 budget, it will be replaced by continued targeted spending. Economic growth and employment will be higher priorities than restoring our fiscal position.
The last Australian budget to resemble this was Paul Keating's post-recession "One Nation" budget in 1992. At the core of that document, and at the heart of the 2020 budget, is Keynesian countercyclical measures such as wage subsidies, infrastructure spending, tax cuts and investment incentives for business skills.
Underlying this new policy is a dramatic shift in the thinking of a conservative government. No wonder Prime Minister Scott Morrison felt the need to receive the blessing of former PM John Howard for such a momentous shift in Liberal Party policy direction.
On the income side of the budget equation, taxes will be lowered. Before the crisis, this was already built into the forward estimates, where a radical change in the tax structure will mean that we all pay less tax. These reductions were scheduled to take place in 2022 and 2024, but are now likely to be brought forward into next week's budget.
On the expenditure side, according to a government source, "the first phase will see continued temporary, proportionate and targeted support during the recession and this will remain in place until the recovery is assured".
Next week, the Treasurer will prioritise jobs growth, until unemployment falls below 6 per cent. Frydenberg said: "We will then move to phase two if we are confident that the recovery has taken hold, and this will focus on restoring our fiscal position. While the government is prepared to oversee years of debt and large deficits, our revised fiscal strategy is consistent with our (Liberal) core values".
Really? This policy volte-face is a radical shift from the Liberal orthodoxy that has held sway in the party for the past 35 years. During this time, particularly under the influence of John Howard, the conservative wing has dominated with its balanced budget mantra. Now, with his deft handling of the COVID-19 crisis, perhaps the best in the world, Morrison has unprecedented authority. He is using the 2020 budget to cut through the right-wing ideological positions of many of his colleagues.
Next week he will make the pragmatic decisions necessary to get Australia through its worst economic crisis since the Great Depression.
God speed ScoMo.
Newcastle East's Dr John Tierney AM is a former Hunter-based senator for NSW
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