Cut to forecast creates a grim backdrop to budget

Pre-budget revelations by Jim Chalmers about the Australian economy facing a serious slowdown in growth and rising unemployment in the next 18 months should douse expectations of largesse on Tuesday night. The budget papers will show real GDP growth in Australia has been downgraded to 3.25 per cent for 2022-23, a 0.25-percentage-point reduction compared with the Pre-election Economic and Fiscal Outlook, and 1.5 per cent for 2023-24, a one- percentage-point reduction compared with the PEFO. Treasury attributes the projected falls to interest rate rises curbing spending, persistent inflation hitting 7.75 per cent later this year and the looming global downturn, driven by China’s economic problems, the war in Ukraine and energy problems. The falls would take the equivalent of $25bn out of the economy. Treasury is now at odds with the RBA over the impact of higher interest rates and the impact of global factors on the domestic economy, forecasting a bleaker outlook. The Treasurer has also warned of ongoing hip-pocket pain for workers, with real wages expected to remain below inflation for another year – the same situation that, under the Coalition, was roundly criticised by Labor and the union movement. As Dr Chalmers said on Sunday, Australians have not been immune from rampant global inflation, heightened uncertainty and cost-of-living pressures.

That grim outlook demands several responses. First, while the Reserve Bank is independent, it is vital that its board and the government work in tandem to ensure fiscal and monetary policy work together to tame inflation while avoiding a fall into recession. Second, because stronger commodity returns, which remain the backbone of the national economy, have boosted the budget bottom line by $28bn, the government needs to be pragmatic in encouraging gas and other energy exploration and export. If necessary, it must pressure states to remove barriers that impede the resources industry. Third, recurrent spending must be contained and cost-of-living relief tightly targeted. Given current circumstances, Finance Minister Katy Gallagher has been proactive in auditing, saving and redirecting more than $21bn spending from Coalition-era infrastructure projects, grants, external labour, advertising, travel and legal expenses. New budget measures need to be directed to lift the productive capacity of the economy. The same applies to industrial relations policy. It must be geared to productivity gains in return for wage growth – a Labor priority. Dr Chalmers has pushed back against warnings that the nation’s uncompetitive tax rates will deter global investment. The rates are uncompetitive, however, especially the corporate rate, and need reform in future budgets.

As reported on Monday, the budget will invest in 20,000 extra taxpayer-funded university places in teaching, nursing and engineering, with most places to go to five regional universities. The move makes sense because professionals from the three disciplines are in acutely short supply and increasing workforce skills boosts productive capacity. In line with Labor’s social outlook, disadvantaged, Indigenous and rural students will be among major beneficiaries of what will be a $485.5m investment over four years. For their sake, and that of the economy and those they will nurse and teach, the universities must maintain rigorous entry and academic standards, which some regional universities, unfortunately, have not done with entry standards to teaching degrees in the past. The provision of 180,000 fee-free TAFE and vocational education places should also aim to boost workforce skills. In the current, challenging environment, non-inflationary spending to help growth is the way forward.