While much of the post-budget commentary focuses on who got what, budgets should be assessed on how well they help to manage the economic cycle, especially the current inflation pressures, and at the same time support our economic resilience, inclusiveness and growth prospects. While the government can point to some success in these areas, it ducked the bold actions required to comprehensively address the economic times.
Slim surplus
The post-covid turnaround in both the economy and budget finances has been remarkable. The economy is booming, with commodity prices at record highs, the unemployment rate at three and a half per cent (a 50-year low) and wages growth finally picking up. These factors have underpinned a strong turnaround in the budget, with a small $4 billion surplus now expected for the year ending June 2023, instead of the $78 billion deficit that was forecast at this time last year. But that slim surplus is not expected to last, as global commodity prices fall back and the Australian economy slows in response to the sharp rise in interest rates by the Reserve Bank of Australia (RBA) to address the rapid rise in inflation (now at seven per cent).
Cost of living challenges
The government’s short-run task was to provide targeted cost of living relief to the most vulnerable without boosting the excess demand pressures that are driving inflation. The government claims that its $12 billion boost to welfare payments and energy subsidies in the year to June 2024 has met that goal, and points to the reduction in headline inflation that lower household energy costs imply. But as far as inflation is concerned, any excess in what the government spends relative to the taxes it receives adds to excess demand, and any relief in households’ energy costs frees up money for them to spend on something else. This just makes the RBA’s job harder to achieve; don’t be surprised if interest rates continue to rise.
Government Ministers noted during their budget briefings that they know they still have more work to do to undertake budget repair.
Looking further ahead, the government to its credit banked much of the expected large revenue windfall over the next four years. Net public debt as a share of GDP is now projected to stay only a little above its pre-COVID days. Nonetheless, the budget position deteriorates from this year, partly reflecting the growing disability, military, aged care, energy transition and other spending pressures.
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But the biggest contributor to these forecast deficits is the Morrison Government’s stage three tax cuts that kick in from July 2024. These cost reportedly $69 billion over the four-year forward estimates, pretty close to the cumulative budget deficits of $110 billion over the same period. As has been extensively discussed, these skew towards the highest income earners, with those earning $50, 000 a year getting $125 a year while those who earn $200,000 receive $9000 a year. This is hard to square with a budget that declares to focus tightly on relief for the most vulnerable. While the government can point to a rise in some taxes such as on high superannuation balances and profits of gas companies, these changes are pretty timid, raising only $20 billion over the next four years. A charitable interpretation is that the government still has time to re-examine the tax cuts before they start in mid-2024; we’ll see.
Missed opportunity
The biggest gap in this budget is the lack of a strong narrative and supporting actions to boost productivity growth (output per hour worked), even though that would be the biggest contributor to rising wages and living standards over time. The few measures included around training and female participation fall way short of the expansive 71 recommendations in the recent Productivity Commission report – not to mention its earlier Shifting the Dial report, Harper Competition Policy Review, Henry Tax Review, and multiple others that sit on shelves largely unimplemented. This is curious given the assumed pick up in the pace of productivity to 1.2 per cent a year in the budget’s 10-year forecasts; this won’t happen in the absence of a forceful and funded program to promote competition, dynamism and new skills.
Where to from here?
Government Ministers noted during their budget briefings that they know they still have more work to do to undertake budget repair. But the economic and political cycles will just get harder from here. This was the time for a larger downpayment on our economic resilience and funding of wide-ranging structural reform. The question this budget leaves unanswered is, if not now, then when?
David Orsmond, pictured, is Professor of Economics at the Macquarie Business School. He previously held senior positions at the Reserve Bank of Australia and the International Monetary Fund.
