Question

Treasurer Josh Frydenberg is making the right call by declaring that it’s time to "draw some clear lines in the sand" and start shifting towards "normalised" government spending, as The Australian Financial Review has urged. The extraordinary $300 billion in federal government pandemic support for business and households saved lives and livelihoods, as Australia’s comparably very low death rate and lowest – 4.2 per cent – unemployment rate since the peak of the China resources boom show. But it has blown a giant hole in the public finances, with $340 billion in cumulative federal deficits forecast across the forward estimates, and with net federal debt set to blow past $1 trillion. As the Financial Review has maintained, the temporary borrowing-from-the-future must stop, and budget repair must start, as part of learning to live with COVID-19. The omicron wave and closed international border are still hurting some businesses. Hence the call by NSW Treasurer Matt Kean for federal cofunding of NSW’s $1 billion business support package. Yet the dire predictions that the economy would fall off a cliff when JobKeeper ended have been proven wrong, as there are now more jobs in Australia than before the pandemic. As Mr Frydenberg suggests, prolonging the life support risks doing more harm than good, by robbing the reopening and rebounding economy of the dynamism that replaces failed businesses with growing enterprises that can create new and higher paying jobs.

Answer 1

Treasurer Josh Frydenberg aims to return to normalised government spending after extensive economic support during the pandemic. This situation reflects a common tension in fiscal policy where governments balance between stimulating the economy during downturns and reducing deficits during recoveries. Discussions about proper fiscal measures reflect a broader context of expansionary and contractionary policies.

Step-by-step explanation:

The discussion surrounding Treasurer Josh Frydenberg's declaration to shift towards 'normalised' spending amidst the backdrop of pandemic-induced economic support points to broader themes within expansionary fiscal policies and budget deficits. During economic downturns, such as the 2007-2009 recession and the recent pandemic, high-income countries like the United States have resorted to large budget deficits to stimulate the economy. These actions included aggressive spending measures such as enhanced unemployment insurance, aid to state and local governments, and direct stimulus checks to households. While these measures were necessary to mitigate economic downturn, they substantially increased national debt and deficits, prompting discussion on eventual budget repair and a return to normalised government spending.

However, recovery from recessions typically involves balancing budget control efforts with growth stimulants, often leading to a tug-of-war between political preferences for expansionary monetary measures and the need for contractionary steps, like lower government spending and higher taxes, during economic upswing periods. As economies rebound, policymakers face the challenging task of unwinding the expansive fiscal support without stunting economic growth. The Australian Financial Review's position that governments should cease temporary borrowing to sustain such spending aligns with this fiscal prudence.