Budget reforms essential as the economic luck runs out

Independent economist Chris Richardson’s pre mid-year economic forecast commentary is aptly titled The Carnival is Over. The federal budget is expected to be deep in the red this financial year and Jim Chalmers, ahead of national accounts figures to be released on Wednesday, has said Treasury is expecting to revise down company tax receipts for the first time since 2020. Problems in the Chinese economy are weighing on commodity returns; iron ore prices are down 30 per cent since the start of the year. “The hollow log provided by past Treasury conservatism is a lot less hollow than it used to be,” Mr Richardson’s report says. Peaks and troughs in budget revenue because of national and global conditions explain why structural deficits are problematic. Australia’s fundamental budget weakness is one the Treasurer and Anthony Albanese can and should control but do not want to do so for political and ideological reasons – that is, public spending.

Mr Richardson’s report contains compelling facts. As a result of a 5.7 per cent increase in outlays across the past 12 months, government spending is back to its Covid-19 high of about $700bn, he points out, after a sharp fall around 2021. Under the heading “Where the bodies are now buried – they’ve been shoved off-budget’’, the report notes the widening gap between headline and underlying budget balances. It identifies “increasingly dodgy action off budget”, leading to headline deficits that “may be $20bn worse than Treasury estimated in the May budget, meaning they’re set to total $220bn between now and 2027-28”.

The report poses a sobering question: “What happens when good luck is finally overtaken by bad luck? After all, few people would argue that austerity is smart amid a run of bad luck. So how come we’ve been happy to see decisions that worsen the budget made during the most spectacular run of good luck the budget has ever seen?”

Amid a sea of red ink, both major parties must prioritise responsible economic reform, not populist sweeteners, in the coming election campaign. For example, as the Prime Minister reportedly prepares to announce a flat daily fee of $10 or $20 for childcare, economists warn it will lead to an “explosion of costs” while primarily benefiting high-income families.

If Peter Dutton and his Treasury spokesman, Angus Taylor, want to be taken seriously as alternative economic managers, they also must address the issue with a broad commitment about the upper limit a Coalition government would impose on spending as a percentage of GDP and where savings would be made. The Carnival is Over throws the Opposition Leader a curve ball, describing his nuclear power ambition as “dumber than the (Victorian government’s) Suburban Rail Loop’’: the “engineering is really good, but the economics is really bad”. The onus is on Mr Dutton to produce cost-benefit analyses comparing his proposals with the costs and downsides of a sole focus on renewable power generation and transmission. If he can present a credible alternative economic narrative, Dr Chalmers is leaving him plenty of scope to argue “It’s the economy, stupid”.

Current interest rates, compounded by underlying inflation and big government spending, are a reminder that much is wrong. The government’s record, Geoff Chambers reports, is one of adding $104bn in spending while raising taxes by $44bn and wasting fiscal restraint opportunities. Mr Richardson makes the case that Australia’s “budgetary luck is running out”. Resources booms may well recur. But as Paul Keating realised in 1986 when he identified the need to avoid a “banana republic” or “economic museum”, rational economic reforms are vital. These should involve public spending restraint and industrial relations, tax, productivity and competition policy reform, preferably with bipartisan support. If either major party is up to it, the campaign offers the chance to kickstart a better economic trajectory.