Big-spending budget sparks inflation, rates concerns

Budget week had enough angst over inflation, interest rates, taxpayer-funded goodies and drama for Australians to re-engage after a bit of a political hiatus since the election a year ago. Anthony Albanese and Jim Chalmers hope their important initiative in salvaging Medicare bulk billing and their generous cost-of-living package will cement Labor’s dominance; Peter Dutton stood his ground, appealing to middle Australia by pointing out that the budget had little for those not on government payments (apart from big childcare concessions).

Evidence of bracket creep showed the need for the stage three tax cuts and flatter, lower personal tax rates. In his budget reply, the Opposition Leader also opened the conversation the nation has needed for a long time on small modular nuclear reactors as part of the zero-carbon energy mix. The first official surplus for 15 years also reignited the economic credibility debate.

The Treasurer has a spring in his step as the first since Peter Costello to produce a surplus. In the Howard government, Mr Costello brought 10 surpluses. Under the methodology used since 2020 to calculate surpluses (agreed to by both sides of politics), Dr Chalmers’ bottom line was helped by the inclusion of $5.36bn net earnings from the Future Fund, established by the Howard government in 2006, which Mr Costello continues to chair. If the same methodology had applied in 2018-19 when Josh Frydenberg balanced the budget, the Morrison government would have delivered a surplus of more than $7bn.

As Paul Kelly writes in Inquirer, economist Chris Richardson says Dr Chalmers is the luckiest Treasurer with the economy delivering the biggest revenue gifts in the past century and a half: “How could a treasurer muck that up? Chalmers makes the most of that revenue by getting a far superior bottom line without punitive decisions.” While Dr Chalmers boasts that in this budget he took 82 per cent of the revenue windfall to the bottom line, that overlooks a key number, Kelly writes – “the huge $13.4bn increase across four years in aged-care payments, largely arising from the government funding the Fair Work Commission pay rise”. That figure appears in the budget not as a policy decision but under “parameter and other variations”. If cast as a policy decision, which Dr Chalmers obviously rejects, his bottom line commitment would be more like 70 per cent – substantial but little different from Mr Frydenberg’s last budget that banked about 75 per cent of revenue upgrades.

Beyond the jiggery-pokery of counting techniques and categories for pigeonholing receipts and figures, two of the main tests of the budget will be its contribution to fixing the structural deficit, and its impact on inflation. Dr Chalmers’ projection that debt will be almost $300bn lower by the end of the medium term, saving $83bn in interest costs across the next 12 years, was a strong positive. But the government’s failure to set out a firm plan to limit eligibility for the National Disability Insurance Scheme, one of the fastest growth areas of spending, is a serious problem. If Mr Richardson’s rough rule of thumb that every $6bn in lower spending or higher taxes translates into the need for one less rate hike, the extra temporary and baked-in spending in the budget will result in householders with mortgages saddled with more interest rate rises for longer. That would not augur well for economic growth. The budget’s projections on that score were dismal, expecting growth to slow from 3.25 per cent in 2022-23 to 1.5 per cent next financial year before edging up to 2.25 per cent in the following year.

Business groups warned the budget was a missed opportunity to boost investment and growth, which would put living standards at risk and make fiscal repair more difficult. Australian Industry Group chief executive Innes Willox told The Australian it lacked “the urgency and imagination required to power the economy through a ­period of anaemic growth”, doing little to kickstart “structural reforms needed to boost productivity, investment, innovation, job creation and sustainable real incomes growth”.

It was also a big week for state finances, with the West Australian budget reaping a surplus of $4.2bn, an outcome that could prompt other states to seek fresh reform of GST allocations. Victoria, a fiscal basket case, missed out at this stage on extra money for its 2026 Commonwealth Games. For political reasons, Premier Daniel Andrews’ reaction was restrained. But the impact will be seen in the state’s budget in just over a week. The $240m set aside for Hobart’s new AFL stadium drew a mixed reaction in Tasmania, where concerns about the health system are rife. The public is no longer mesmerised by big-spending projects and expects value for money. That is why $1bn of federal money committed to the 2032 Brisbane Olympic Games will intensify scrutiny of how federal and Queensland taxpayers’ funds are being spent on preparations. From interest rates and inflation to living costs and taxes, voters are becoming more discerning in their grasp of the economic landscape.