Hollow Chalmers runs from the tariff battle of the ages
Jim Chalmers may have declared victory on the economy but after four budgets there’s plenty of risks and few answers to Australia’s big challenges.
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There’s an almighty economic global fight that’s brewing and Australia sits right in the firing line.
Instead of shaping a budget to financially fortifies Australia from likely trade shocks, including slowing China growth, the treasurer has cruised into pre-election mode promising spending on everyone – including an eventual $10 a week in additional tax cuts.
The Treasurer declared victory on the economy after a painfully tough post-Covid era saying “the worst is behind us and the economy is now heading in the right direction”. However it comes at a cost: debt is escalating and business investment has collapsed.
With four budgets now to his name, Chalmers is looking more and more like a hollow treasurer – plenty of policy gloss, but little substance.
Every one has gone soft on substantive policy reform, with the answer to Australia’s big challenges is to spend more.
This budget’s unashamed retail pitch comes as the world’s two biggest economies are now locked in a trade battle. Throw in Europe with US President Donald Trump threatening to reveal all about his tariff plan on April 2 – with Australia unlikely to be spared and it’s all downside risk for the big drivers of global growth
Chalmers has switched the script to safe Labor by framing the budget around education, health and housing, while making up for lost time on cost of living.
Surging tax take from mining and company profits delivered Chalmers a financial head start in years past, but that tailwind is fading fast.
Entering the second half of this decade, Australia’s finances are out of shape, inflated and wholly unprepared for the economic hit that’s coming.
The structural pressures are there for all to see in this budget including interest payments, NDIS, aged care, and defence each pushing up spending. Those pressures are only getting more pronounced with the deficit hitting $42.1bn this year from a deficit of nearly $28bn last year.
There’s budget deficits as far out as the eye can see amounting to nearly $180bn over the forecasts, with little sign of returning to the black.
Spending is forecast to grow 2.7 per cent over the five years. This is an improvement on the annual average of 3.2 per cent over the past three decades. Although that was during period when Australia was growing at a faster rate, inflation was falling and revenue at least matched that growth. Today is a wholly different era.
The heavy lifting of revenue in coming years will come from income and super tax, helped by a better-than-expected jobs market. Company tax is set to fade away with softer commodity prices weighing on mining profits. All up company tax has been downgraded by $1.9bn over the next five years.
This is the second time since the Covid pandemic company tax has been revised down. It suggests beyond mining company tax profits are in for only sluggish growth. Indeed the outlook for business investment – a future driver of profit growth is to grow between 1 per cent and 1.5 per cent over the next few years.
For his part Chalmers says $94bn in spending restraint over the forecast period – including $2bn in this budget – reflects “responsible economic management”.
However this year spending is forecast to lift by 6.2 per cent, further adding to inflation pressures in the economy, and this follows a more than 5 per cent rise last year. Spending is set to peak at a hefty 27 per cent of GDP next year. The spending lift only builds on inflationary pressures, making it harder for the Reserve Bank to cut rates.
RBA governor Michele Bullock last month said the February rate cut taking the cash rate to 4.1 per cent “wasn’t a lay down misère”. The central bank is still aware of inflationary pressures in the economy and this was preventing deeper or faster cuts.
Treasury is more optimistic than the central tipping inflation at 2.5 per cent next year, although that is helped by the $1.8bn in energy bill subsidies. Inflation is forecast to shift to 3 per cent as bill relief comes off, before holding at 2.5 per cent. The RBA is slight more cautious, tipping inflation at 2.7 per cent in coming years.
Gross debt, on which net interest payments are calculated, is forecast to bust through the $1 trillion barrier this year. It balloons to $1.22 trillion by 2029, or nearly 37 per cent of GDP. Debt is up from $940bn currently.
The Chalmers budget comes with a backdrop of a patchwork economy. Businesses have reported that parts of Queensland, Western Australia and the Northern Territory are surging.
Businesses connected with resources, energy, infrastructure and government projects are seeing increased investment. However the constant theme is southeast Australia, in particular Victoria and parts of Sydney, are finding things tougher.
National Australia Bank’s latest monthly business survey showed a sharp reversal in business confidence, which fell six points with the RBA indicating caution toward the timing of future interest rate cuts.
The drop in business sentiment in February takes confidence below the long-run average and back into negative territory.
Retail billionaire Solomon Lew tells The Australian: “It’s spend, spend, spend by the government, and I’m concerned for the generations that are behind me that they will never be able to pay off the debt”.
To spur on much-needed confidence, business “needs a reset,” he says.
Chalmers takes a timid stab at productivity reform, although he approaches this from an industrial relations lens, with an eye to pushing up wages. Here he is banning non-compete or restriction clauses for low- and middle-income workers, freeing up more than $5bn in benefits for the economy. He’s also rolling out a national licensing scheme for electricians so they can work in any state without friction. It’s very light touch.
A pre-election Labor budget was never going to tackle the productivity big issues: corporate tax reform; flexible industrial relations; planning and cutting regulation. These were all left on in the too-hard basket for another budget or another government entirely.
As BHP chief executive Mike Henry recently said: “At the end of the day, the game is wholly about productivity”. However the budget retains the outlook for tepid productivity rate over the long run of just 1.2 per cent annually.
Chalmers nominates the “five seismic changes” shaping this new world of uncertainty. The shift from globalisation to fragmentation; the move to renewables; the dawn of AI; an ageing population and major upheaval to the nation’s industrial base. To tackle these, Australia needs big thinking and not a safe pre-election budget.
eric.johnston@theaustralian.com.au
Originally published as Hollow Chalmers runs from the tariff battle of the ages
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