RUBY:

From Schwartz Media I’m Ruby Jones this is 7am.

As the Treasurer puts the finishing touches on the upcoming federal budget, one of the most important in a generation, he’s facing pressure to spend big and keep the economy afloat.

But can a government historically preoccupied with cutting spending and achieving a budget surplus take the plunge and provide more economic stimulus?

Today - columnist for The Saturday Paper, Paul Bongiorno on the challenge facing Josh Frydenberg, and the country.

**

RUBY:

Paul, next week, the Treasurer, Josh Frydenberg, will deliver the budget after it was postponed because of the pandemic. So what do we know about what's coming?

PAUL:

Well, Ruby, last year the government delivered its now famous ‘Back in the Black’ budget, but far from delivering the promised surplus for the financial year 2019/20, the Treasurer revealed last Friday a mind blowing budget outcome of 85 billion dollars in deficit. And that's the biggest on record.

According to a raft of economic forecasters, Treasurer Frydenberg will announce an absolutely mammoth deficit topping that for next year, somewhere north of 200 billion dollars. And Ruby, we got a foretaste of how he'll pitch it earlier this week. Treasurer Frydenberg, at his joint news conference with the prime minister, said Covid-19 had changed the world.

Archival tape -- Josh Frydenberg:

“As we all know, Covid-19 has changed the world. Covid-19 has changed Australia and Covid-19 has changed the way businesses do business.”

PAUL:

And he further said that recovery is underway everywhere except in the nation's second biggest state.

Archival tape -- Josh Frydenberg:

“The Australian economy is operating at two speeds. There's Victoria and then there's the rest. Outside of Victoria the jobs have come back..."

PAUL:

But the problem for him as federal treasurer is that when 20 percent of the national economy has been ravaged by the pandemic running out of control, it presents daunting challenges for the federal government. In many ways more than for the state government.

RUBY:

So the pandemic has blown a massive hole in the budget and the coalition's plans for a surplus. So is there any indication that they are still committed to that long term ideological goal of reducing debt?

PAUL:

Well, this is where Josh Frydenberg gets lucky. Luckier than, for example, Labour's Wayne Swan when he was treasurer, this treasurer has been offered a leave pass from his political opponents. The Reserve Bank and a large number of influential economists to abandon the holy grail of budget surpluses. Any misgivings on the government's backbench have been muted. Frydenberg has abandoned his previous strategy to deliver surpluses, and I'm quoting his mission statement of the past to deliver statements of sufficient size (to significantly)...

Archival tape -- Josh Frydenberg:

“Reduce gross debt and eliminate net debt by the end of the medium term.”

PAUL:

The Treasurer has basically admitted that trying to limit debt is just not an option now.

Archival tape -- Josh Frydenberg:

“Unfortunately, in the face of this large economic shock, this is no longer the prudent or appropriate course of action.”

PAUL:

The benchmark he sets for a return to this goal will be when the unemployment rate is comfortably back under six per cent.

Archival tape -- Josh Frydenberg:

“It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates.”

PAUL:

While Deloitte Access Economics in its budget monitor believes this won't happen until after the next scheduled election in 2022.

RUBY:

So if the government has the political freedom to spend whatever it wants. Does that mean that we will see more stimulus?

PAUL:

Well, one measure of the strange and unprecedented times we're living through is the fact that the 314 billion dollars in support of the economy, the government has announced since the pandemic is widely believed not to be enough. Mr Frydenbergs rules for the government's responses to be timely, targeted and proportionate hostage to the vagaries of the virus.

You know, a second wave in another state or indeed a third wave in Victoria would render obsolete the four year forecasts and projections. The Treasurer will unveil next week. While the prime minister says the budget will be one of the most important, if not the most important, since the Second World War.

But one of the biggest consultancy firms in Australia, and indeed, in the world, EY this week warned that the current plan to withdraw crisis response stimulus means Australia faces an income support cliff at a time when an insolvency cliff, productivity cliff and construction cliff also loom large.

RUBY:

We'll be back in a moment.

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RUBY:

Paul, what are the economic risks that the government is facing as it draws up this budget?

PAUL:

Well, Ruby, what EY is warning about can be sheeted home directly to the scaling down of the JobKeeper wage subsidy. There's no doubt that many businesses have been kept solvent by the payment and they'll fall over with its withdrawal.

Archival tape -- Reporter:

“More than a third of the nation's businesses are on JobKeeper. It's paying the wages of nearly 30 percent…”

PAUL:

This was dramatically brought home by the ABC Four Corners report this week that two out of three businesses in the New South Wales coastal resort town of Byron Bay are accessing the payment to keep employees on the books and their wages paid.

Archival tape -- Reporter:

“Shuttered shops give a hint of the pain. Tourism made Byron Bay wealthy, but vulnerable.”

PAUL:

They are being hit by the decline in domestic and international tourism.

Archival tape -- Reporter:

“I guess it's just like any farmer who's got one crop. You know, if you've got a monoculture and that crop fails or the market drops, you know, the farmer’s not left with much else. And so Byron's very similar.”

PAUL:

And unfortunately, their plight is shared around the nation.

RUBY:

So what are economic experts calling for in order to avoid collapse?

PAUL:

Well, modelling by EY suggests a mix of policies, including personal income tax cuts, maintaining a higher JobSeeker unemployment payment rate and infrastructure spending. EY says this would be effective in maintaining economic growth? Their chief economist, Jo Masters, has a lifeline, in fact, for a prime minister contemplating a platform for re-election. She says fiscal spending of about 60 billion dollars extra over the next two years could lower unemployment by about one per cent.

Archival tape -- Jo Masters:

“I mean, we don't want to live on life support forever, and we do want the economy to most factor standing on its own two feet led by the private sector. But that's going to take time. Confidence in households and businesses is very weak. And while that's the case, we do need to support household income and we do need to support those most vulnerable.”

PAUL:

Now, another area the government could look to invest in is social housing. In fact, a survey of 49 economists this week put social housing as top of the list. But so far, the federal government's baulking at a social housing construction programme or at least a boosted one. Federal government sources tell me it's up to the states to pull their weight, go out and borrow the millions, if not hundreds of millions needed to meet the estimated shortfall of 433 thousand places in this sector.

You know, the housing sector generally is vulnerable to the collapse in immigration as well. Frydenberg said last week Australia's population growth is expected to slow to its lowest rate in over 100 years.

RUBY:

There have been some murmurings that the Prime Minister might head to an early election to avoid having to deal with the full extent of the economic downturn. How likely is that?

PAUL:

Well, while Morrison and Frydenberg can claim that Australia is weathering the pandemic both in health and economic terms better than most countries, there is a wide expectation in party circles that the prime minister will go to an election in around September next year because this would avoid the risk of things getting worse in the enduring, unpredictable circumstances. Some liberals believe the PM would prefer a double dissolution, taking out the whole Senate as a way of keeping the numbers in the upper house, skewing more to the right. You know, Malcolm Turnbull did this in 2016 and it worked to a point.

RUBY:

Would an early double dissolution election work for Morrison?

PAUL:

Well, South Australian independent Rex Patrick is one who doubts Morrison will do it. He told me the PM will not want to risk having a clutch of Pauline Hanson or Clive Palmer senators in the parliament to deal with like Turnbull had. He may be right, but Morrison, according to those who've worked with him over the years, well, he'll keep all his options open. We know that he's a very successful political main chancer.

The prime minister would need a double dissolution trigger, though, where the Senate rejects a government bill twice. So far, he hasn't got one. But a liberal told me it wouldn't be hard to revisit the union busting industrial relations bill that was shelved earlier in the year when the pandemic demanded national unity. Senator Patrick says that would be the liberal leopard regaining its old spots.

RUBY:

And what do you think, Paul? Do you think Scott Morrison would go down this path?

PAUL:

Well, I think that, as I say, he's a political main chancer, and there is a wide expectation that we will go to an election, whether it's a half Senate or a double dissolution next year in the second half of next year. Mind you, if he goes to a double dissolution, he has to do it in the first half of the year because of a constitutional constraint, which we don't need to go into. But all options, I'm sure, on the table. And the guiding light here is the uncertainty of the virus.

RUBY:

Paul, thank you so much for talking to me today.

PAUL:

Well, thank you, Ruby. Bye.

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RUBY:

Also in the news today:

The Victorian government has stood down private security in the state's current ‘hot hotel’ quarantine program.

They’ve been replaced by police officers, after concerns were raised about poor infection control.

As we reported on 7am on Monday, there have been multiple covid-19 cases among staff at two quarantine hotels, since the beginning of August. The government has now confirmed nine staff, including five contractors, have tested positive.

Victoria’s hotel quarantine inquiry will now investigate how staff at those two hotels became infected.

Victoria recorded 15 new cases and two deaths on Thursday, bringing the state's death toll to 800.

7am is a daily show from The Monthly and The Saturday Paper. It’s produced by Ruby Schwartz, Atticus Bastow, and Michelle Macklem.

Elle Marsh is our features and field producer, in a position supported by the Judith Neilson Institute for Journalism and Ideas.

Brian Campeau mixes the show. Our editor is Osman Faruqi. Erik Jensen is our editor-in-chief. Our theme music is by Ned Beckley and Josh Hogan of Envelope Audio.

New episodes of 7am are released every weekday morning. Subscribe in your favourite podcast app, to make sure you don’t miss out.

I’m Ruby Jones, see you next week.