Josh Frydenberg’s budget priorities are right – budget repair can wait

Leaving aside the self-interest of high income-earners, many conservatives’ concern about our high level of debt is just instinctive. They have a gut feeling that it must be dangerous. They really ought to give the matter more study.

But here’s something even many well well-versed people don’t realise, mainly because it hasn’t suited the politicians and econocrats to tell them: effectively, all the bonds the government has had to issue to cover the huge budget deficits since the pandemic are now held by . . . the Reserve Bank of Australia – which, of course, is owned by the federal government.

So most of the extra interest the feds are paying will find its way back to the budget in the form of higher dividends from the Reserve.

This is not because the Reserve bought the new bonds directly from the government, but because its extensive program of “quantitative easing” – buying second-hand government bonds and paying for them by creating money out of thin air – has amounted to a sum roughly equal to the new bonds sold to the public.

But the most important thing to understand is Frydenberg’s repeated statement that the government’s strategy is to “repair the budget by repairing the economy”. This is not just another meaning-free slogan, it’s a statement of fundamental economic truth and political reality.

Governments rarely pay off the debt they incur. Rather, they reborrow to cover their bonds as they fall due, and concentrate on ensuring the economy grows faster than the debt’s growing, thus reducing the debt relative to the size of the economy – and the taxes being paid by the people in the economy.

If Frydenberg can get us back to the lowest unemployment since the 1970s, he’ll be up there with Paul Keating as one of our greatest treasurers.

Which brings us back to where we started: Frydenberg’s strategy of forcing the pace of economic growth to get the rate of unemployment sustainably down to the low 4s or even lower.

This strategy – to keep pushing unemployment down until it’s clear the inflationary pips are squeaking – was first suggested by Professor Ross Garnaut in his book, Reset, and taken up by Peter Martin, of The Conversation website.

It was inspired by the example of the United States which, before the pandemic, got unemployment down to near 3 per cent before wages got moving.

The first point is that there’s nothing better you could do to make the economy bigger (and bigger relative to the public debt) than to ensure more of those who want to work actually get jobs, earning incomes and paying taxes.

Labour lying idle is the worst kind of economic inefficiency.

But the strategy has a deeper objective: to make the market for labour so tight that employers have no option but to increase wages to retain the people they need.

Like all sensible economic managers, Frydenberg’s unspoken concern is the risk that, once the economy has rebounded from the coronacession – with considerable help from temporary fiscal stimulus – it falls back into the “secular stagnation” low-growth trap that the rich countries have been caught in since the global financial crisis.

Our wage growth has stagnated since this government came to power. It’s the most important single cause and consequence of our low growth. Labor will be making hay with this in the election campaign.

Ending wage stagnation is the key to a sustainable return to a healthy rate of economic growth. And given the Coalition’s tribal objection to using regulatory reform to get wages moving, getting unemployment down and tightening the labour market is the right solution to the problem.

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Once it has been solved, the budget balance will be improved and the public debt will be less worrying to the unversed. If Frydenberg can get us back to the lowest unemployment since the 1970s, he’ll be up there with Paul Keating as one of our greatest treasurers.

In this column last Monday I overstated the regressiveness of the stage three tax cut. I quoted a summary of the findings of analysis by the Parliamentary Budget Office, but should have checked it. The office’s actual findings are that about two-thirds of the tax cut will go to taxpayers earning $120,000 or more. The highest-earning 20 per cent of taxpayers will receive more than three-quarters of the money. My statement that only a third will go to women remains correct.

Ross Gittins is the economics editor.