The post-budget commentary will be focused on league tables showing how much we each got or lost from tax changes, and talking heads will discuss how happy they are with the funding allocated to each sector of the economy. Much of the focus will be on public services like education, health, aged care and welfare as the government and its budget tries to reach out to as many voters as possible.
But the annual budget exercise offers an opportunity to play a very different role. The government’s budget should be viewed by how much it helps to manage the business cycle and the steps it takes to shore up our future growth prospects and economic resilience. Those roles are even more important than usual at this time, given the rise in inflation pressures, historically high level of public debt and weak medium-term growth prospects that we have found ourselves in in a post-pandemic world. Now is the time for significant budget repair and a downpayment on economic reform.
The inflation surge is the biggest threat. Household savings increased by $300 billion during the pandemic as people were paid salaries and new welfare assistance but could not spend it due to the shutdowns. With businesses now open again, we are all trying to spend those savings at the same time. While firms have tried to produce more by hiring new staff, demand for goods and services has been so strong that prices have increased sharply.
Like households, over time governments need to balance their expenditure within the available revenues taking into account their priorities.
The Reserve Bank is trying to pull that spending back by raising interest rates, but new government spending and handouts simply add to that excess demand and the subsequent inflationary pressures. And this challenge for the government has coincided with a sharp rise in the underlying trend in disability, military, climate change and ageing-related spending. Budget deficits (the excess of spending over revenue) in last year’s budget were forecast at 2 per cent of GDP as far as the eye can see despite the booming economy. The first challenge then is to bring the overall budget position back to broad balance, which suggests that any ‘cost of living’ relief provided is limited to only those most in need.
Kick start reforms now
The pandemic and other recent shocks have also left Australia with a public debt level 30 per cent of GDP higher than before the 2007-08 global financial crisis. While Australia’s debt level is still low compared with other countries, debt levels that ratchet up during each economic shock that are not then reduced once the crisis passes lower our resilience over time, especially for countries like Australia that typically have to attract the world’s saving to finance our investment. The large and likely temporary boost to income tax collections from the current high global commodity prices and employment offer an opportunity for this budget to make a large downpayment in that regard.
Time for action: Professor David Orsmond says reforms such as measures to boost housing supply are needed now.
Budgets also offer a chance for governments to make an investment in long-term economic reform. Most reforms cost money to get them started, given the need to ease the short-term adjustment costs to those who lose out before the wider benefits from higher rates of economic growth kick in.
There is no shortage of ideas on what needs to be done, captured in the 71 recommendations in the recent report by the Productivity Commission. These include efforts to boost housing supply, introduce road congestion charging, streamline government service delivery, boost competition throughout the economy, and expand skills locally. Governments of all stripes have paid lip service to reforms in these areas over the past decade or so; now is the moment for action.
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Finally, budgets cannot make everyone happy. Like households, over time governments need to balance their expenditure within the available revenues taking into account their priorities. Using a clear cost-benefit approach to every infrastructure and other spending decisions backed by a well-justified tax collection plan can ensure politics does not get too far ahead of sound economic and social policy.
We have a strong stake in ensuring public scrutiny of government decisions to shore up accountability over scarce budget funds. Committing to publish every cost-benefit assessment at each new budget policy decision would go a long way to building confidence that our money is being well used. And that’s a reform that would really give us something to talk about on budget night!
David Orsmond 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.
