Baked-in spending will cost taxpayers, business long term

Illustration: Johannes Leak

The Albanese government’s third budget deserves the moniker “audacious” for the wrong reasons. What sets this budget apart and marks it out as inferior to the efforts of Paul Keating, who delivered four surpluses, and Peter Costello, who delivered 10, is that it unashamedly increases the footprint of government in the economy and in Australians’ lives. The era of liberal economic reform that has served Australians well for decades is over, buried, for now, by Jim Chalmers. From housing supply to green energy to topping up the pay packets of aged-care, childcare and other workers, including apprentices in the building industry, the change will come at a heavy price to business and individual taxpayers.

Johannes Leak's Federal Budget Cartoon

But credit where it’s due, to the hardworking taxpayers and enterprising businesses, small and large, especially in the resources sector – iron ore, coal and gas – that have produced the extra revenue to allow the federal Treasurer to deliver a second consecutive budget surplus, of $9.3bn. It has been achieved despite, not because of, the Albanese government’s policies. The outcome is a marked improvement on the $13.9bn deficit forecast in last year’s budget. Some of Dr Chalmers’ colleagues might have wanted to spend even more across the past 12 months, but at least he and Anthony Albanese resisted. It matters. “A stronger budget means we save around $80bn in interest costs over the decade,” Dr Chalmers said in his speech. The budget papers underline the importance of paying down debt as soon as possible. Interest costs are listed as the government outlay forecast to grow the most until 2034-35.

Interest repayments are followed by the National Disability Insurance Scheme, defence, hospitals, medical benefits and aged-care spending. Reform of the NDIS is essential and the measures outlined are modest, ongoing and a step in the right direction. They will involve states taking back responsibilities they have abandoned across the past decade, a point on which Canberra needs to be firm. The NDIS reforms outlined would save the federal budget bottom line $14.4bn across the next four years, with cost rises to be contained to 9.2 per cent annually. The scheme, which currently costs about $40bn a year, is projected to cost $218bn across the next four years – hardly a major clampdown. As the budget papers note, expenses related to the NDIS are estimated to increase by $11.1bn across four years from 2023-24 to 2026-27, and by $4.5bn in 2027-28.

The expected budget deficit of $28.3bn for 2024-25, while concerning, is no surprise. It is in line with Dr Chalmers’ warning of “intensifying structural pressures” and the need to fund “unavoidable spending”. Aside from increasing defence spending, which has been back-end loaded too much amid the most challenging strategic outlook in the Asia-Pacific for almost 80 years, and increased funding for the Australian Border Force to deter and manage asylum-seekers, the government’s claims about “unavoidable spending” do not ring true.

While paying lip service to the importance of reducing federal debt and interest repayments on that debt, the budget is heavily geared towards retail politics, setting the stage, if needs be, for this to be Labor’s last budget before going to the polls. After spending the equivalent of 24.5 per cent of GDP in 2022-23, the comparable figure for 2024-25 is expected to be 26.4 per cent and slightly higher the following year.

The budget largesse is broad, with a whiff of “every child wins a prize”. That includes $300 energy rebates “for everyone”, as Dr Chalmers boasted in his speech, and therefore not means-tested, from July, with slightly more to be paid to small businesses. That scattergun approach contrasts with the government’s targeted recalibrating of the Coalition’s stage three tax cuts to give more to middle and lower income earners, with an average tax cut of $36 a week. Pharmaceutical Benefits Scheme prescription costs will be frozen “for everyone” this year and next year, and for five years for pensioners and concession cardholders, who will pay no more than $7.70 a script. In a direct play for young voters, Dr Chalmers wiped $3bn in student debt for more than three million Australians, saving the average HECS payee $1200. For renters, he has lifted the maximum rate of Commonwealth Rent Assistance by a further 10 per cent. Workers will have paid parental leave added to their superannuation. Electoral sweeteners are nothing new to either side of politics. The breadth of Dr Chalmers’s efforts, however, is reminiscent of The Magic Pudding: “The more you eats the more you gets.” Only in the real world someone has to pay, and that will be taxpayers and business.

But as the government strikes out, taking our mixed economy in a new direction, with more elements of a centralised, planned and even command economy, an important element is missing. The word productivity – the lifeblood of delivering the growth needed to fund and sustain heavier, baked-in spending in coming years – did not rate a single mention in Dr Chalmers’ speech. The budget papers noted that productivity had grown for two consecutive quarters and was expected to pick up further as conditions improved. But Treasury acknowledged: “If productivity does not pick up as expected, price pressures may be more persistent, with potential implications for unemployment and the real economy.”

While the speech had nothing about productivity, it had plenty of ambition in relation to building another 1.2 million homes, investing in “a Future Made in Australia” and the skills and universities to make it a reality, strengthening Medicare and “the care economy”, and clearing infrastructure bottlenecks. That ambition, which amounts to growing the economy from the government outwards, is fraught with serious risk. The idea of channelling public money to areas of perceived public good such as “green” energy is appealing to some. But hardheads who have studied the pitfalls of state intervention and picking winners know the dangers are writ large.

The budget narrative also contains a worrying element of throwing the dice, especially in relation to interest rates. Treasury, Dr Chalmers said, is “now expecting we could get back to the inflation target this year, not next. That means inflation is expected to be lower, sooner.” And with it, he hopes, interest rates. In arguing the point so strongly, he is virtually coaxing the Reserve Bank of Australia board to accommodate the government with a rates cut sooner rather than later. With an election due by May next year, the timing will matter. But the RBA board’s response, if any, remains to be seen. At its most recent meeting the board took a more sober view than Dr Chalmers, anticipating that inflation would return to the 2-3 per cent target range in the second half of next year and to the midpoint in 2026. Amid https://www.theaustralian.com.au/domestic cost pressures and excess demand, it warned, that pathway would not be smooth. Neither would it rule out further rate rises. Dr Chalmers is anticipating that cost-of-living relief measures such as non-means-tested rebates will help the process. “The ABS has shown how cutting energy bills directly cuts inflation too,” he said. His aim was “keeping the lights on for families and businesses – and keeping downward pressure on inflation”. That is debatable. Former RBA board member Warwick McKibbin argued on Monday that claiming taxpayer-funded electricity and rent relief were an antidote to inflation was a “political trick” that did not address underlying price pressures. Putting extra money in householders’ pockets, however, may not reduce inflation or solve the underlying pressures keeping inflation high. A week ago, after deciding to keep interest rates on hold, the RBA noted “continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs”.

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While wages growth had peaked, it was “still above the level that can be sustained given trend productivity growth”, the RBA said. Labor’s backward-looking, rigid industrial relations policies, unfortunately, have made addressing productivity more difficult. Independent economist Chris Richardson was on solid ground when he said the budget spending measures had made the RBA’s “juggle trickier”. “My key test for the budget was that it not poke the inflationary bear. I don’t think it’s passed that test,” he said. The prospect of an interest-rate cut was “starting to slip into next year”.

Aside from gambling on a significant fall in inflation by year’s end, the government is also taking a risk in baking in extra welfare, health and other social spending. It has been able to do so and still return a surplus by taking advantage of increased revenue delivered by the nation’s strong terms of trade. However uncomfortable it may be for the Greens, the resources sector remains the nation’s economic lifeblood. Oil and gas alone, according to the sector, is returning enough revenue in a year, about $17bn, to fund 11 public hospitals, 250 schools and pay for 1.76 million Australians’ healthcare. The government would do well to encourage its ongoing development, exploration and investment by limiting red tape, green tape and regulation to what is strictly needed.

But it also should be more careful about how it spends the bounty. Committing short-term windfalls to long-term spending programs is a formula for worsening structural deficits. We can only wonder what illusion Dr Chalmers is under. Asked by The Australian if his budget was “expansionary”, he said: “I don’t accept that.” It is taxpayers who will pick up the pieces.