Wed Apr 28

Budget aims at unemployment with a '4' in front of it

Written by Michelle Grattan, Professorial Fellow, University of Canberra

The government will aim at driving unemployment below pre-pandemic levels in its May 11 budget and avoid any future sharp pivots towards “austerity”, Treasurer Josh Frydenberg will say on Thursday.

Delivering his pre-budget address on the budget’s economic and fiscal strategy, Frydenberg does not give a specific unemployment target but points clearly to wanting to see it below 5%.

Unemployment was 5.1% in February last year, on the cusp of the pandemic. The Reserve Bank has put forward a case for pushing the rate down into the “low 4s ^[1]”.

In his speech, released ahead of delivery, Frydenberg says a new paper by Treasury on the Non-Accelerating Inflation Rate of Unemployment – the rate of unemployment below which inflation is expected to accelerate – puts the NAIRU between 4.5% and 5%, lower than its previous 5% estimate. (The paper will be released on Thursday, as will one on labour market participation.)

“This lower estimate of the NAIRU means a lower unemployment rate will now be required to see inflation and wages accelerate,” Frydenberg says.

“In effect, both the RBA and Treasury’s best estimate is that the unemployment rate will now need to have a four in front of it to deliver this outcome.”

Unemployment was 5.6% in March, although the April figure may be higher ^[2], after the end of JobKeeper in late March.

Frydenberg said despite doomsday predictions about the consequences of JobKeeper finishing, early signs were the labour market had remained resilient. In the fortnight to April 16, the number of people on income support fell by about 46,000.

The Treasurer said that in sharp contrast to previous recessions, following this one “we are on track for the unemployment rate to recover in around two years”.

The government’s ambitions on unemployment have shifted substantially since last year, when Frydenberg first said it would not move to fiscal consolidation until the rate was “comfortably below 6%^[3]”.

In Thursday’s speech he reaffirms that “despite the strength in our domestic economic recovery, the unemployment rate is not yet ‘comfortably below 6%’.”

He says “these are unusual and uncertain times”, so “we remain firmly in the first phase of our economic and fiscal strategy.

"We need to continue working hard to drive the unemployment rate lower.

"That is what [the] budget will do.”

The first stage of the government’s strategy – laid out last year – concentrates on promoting economic recovery; the second stage will look to fiscal consolidation and paying down debt.

“We will not move to the second phase of our fiscal strategy until we are confident that we have secured the economic recovery,” Frydenberg says.

“We first want to drive the unemployment rate down to where it was prior to the pandemic and then even lower. And we want to see that sustained.

"The last time Australia had a sustained period of unemployment below 5% was between 2006 and 2008, just prior to the GFC.

"Before that, you need to go all the way back to the early 1970s.”

Frydenberg says that “against the backdrop of a highly uncertain global economic environment, it is prudent to continue to support the economy and ensure that our recovery is locked in”.

Unlike before the crisis, “the Reserve Bank has reduced scope to lower interest rates to drive unemployment lower and wages higher.

"This has placed more of the burden on fiscal policy.”

“We want more people in jobs and in better paying jobs. This is what our fiscal strategy is designed to achieve,” Frydenberg says.

He repeats the government’s commitment to fiscal discipline while saying circumstances somewhat delay the fiscal recovery. For example corporate tax receipts take time to rebound after a downturn.

Frydenberg says Treasury previously estimated that because of the government’s interventions the economy “will be 4.5% larger in 2020-21 and 5% larger in 2021-22 than if we had not intervened.

"At that time, real GDP was not expected to regain its pre-pandemic level until the December quarter 2021.

"All indications are that we will actually have pushed through that milestone nine months earlier.

"This stronger than expected economic recovery means that our fiscal outlook in the 2021-22 budget will be driven off a higher economic base than expected in last year’s budget.

"This will assist us to achieve our medium-term fiscal strategy of stabilising and then reducing gross and net debt as a share of GDP over time.

"This again reinforces the point that the best way to repair the Budget is to repair the economy.”

While the challenge once the economy had recovered would be to rebuild fiscal buffers, “we won’t be undertaking any sharp pivots towards ‘austerity’”.