High debt, deficit outlook is Labor’s first-term result

Jim Chalmers’ performance at the mid-year economic and fiscal outlook stocktake on Wednesday puts beyond doubt that the nature of the Albanese Labor government is to tax and spend big and kick the consequences down the road for others to fix. Federal government spending will continue to grow in real terms as national income retreats and our historic high terms of trade fades. Government spending now accounts for 27.2 per cent of GDP, the highest in more than three decades.

As the tide goes out on China’s resource-hungry prosperity we, as a nation, risk being left high and dry. There was little in the federal Treasurer’s report on the government’s mid-year economic performance to suggest he has a plan to respond to the new reality. Instead, there is above-inflation growth in government spending, much of it claimed as investments but little to show how it would produce an economic dividend to offset the money spent. The bottom line is $143.9bn in forecast deficits across the forward estimates with a dose of creative accounting to make the immediate picture appear better than it actually is before the election.

When off-balance-sheet spending is included, the headline budget deficit this year is $47.8bn compared with the underlying cash deficit of $26.9bn. The cumulative headline deficits across the forward estimates are forecast to be $233bn.

Dr Chalmers was quick to claim the results as a win. But his breezy, conversational style that offers more by way of commentary than substance is not convincing. The government is keen to paint the spending problems as being the result of decisions taken by the Morrison government. It says spending pressures are unavoidable but excuses that might have passed muster before the first budget of a new government have certainly lost their potency by the final months of a full parliamentary term.

Rather than blame external factors, Dr Chalmers would do better to focus on the problems at hand. Not all are of the government’s making but it still has a duty to respond. Key issues include an ageing population, the need for higher defence spending, rising demand for healthcare services and a growing interest bill on government borrowings. Unfortunately, the government’s actions to date have been to increase healthcare costs, including the National Disability Insurance Scheme, aged care services and a larger public sector overall. This all helps to push spending up 5.7 per cent in 2024, making the Reserve Bank’s job of taming inflation more difficult. Higher spending will push gross debt past $1.1 trillion by 2028, putting further strain on a deficit-laden budget through higher interest rate payments.

As chief political correspondent Geoff Chambers writes, the reality of the structural budget deficit position across the forward estimates makes it unlikely there will be a federal budget before the election is called sometime in early 2025. The question is whether Dr Chalmers’ economic credibility has been spent. Chambers is right to note that when Australians head to the polls in 2025 after being smashed by sky-high bills, power prices and mortgage repayments, few, if any, will vote on the basis that Dr Chalmers handed down consecutive surpluses of $15.8bn in 2023-24 and $22.1bn in 2022-23, underpinned by post-pandemic migration, employment and mining booms. Dr Chalmers’ surplus achievements are now replaced with Coalition attacks highlighting “deficits forever”.

More worrying concerns include the fact there seems to be no answer to the spiralling energy costs and potential for energy shortages that pose a grave threat to manufacturing and sovereign risk.

Meanwhile, China’s economic outlook is more uncertain with the re-election of Donald Trump, who has threatened to start a trade war in which Australia could become collateral damage. In earlier trade disputes with China, the US president-elect was quite prepared to push the interests of American farmers in trade with China over established Australian exports.

The Albanese government’s first-term economic performance leaves a lot to be desired. Taxpayers are on the hook with little prospect of relief. Business faces continued high rates of tax relative to other countries, and more competition for workers and economic space from an increasingly bloated public sector.

It is correct to say that budget discipline has been squandered in pursuit of ideological fancies and a belief the good times will continue to roll. Nowhere is this more apparent than in the restrictions placed on business by new industrial relations laws that are designed to increase costs and suck productivity.

All together, the picture is one of interest rates staying higher for longer and the record high number of business insolvencies in the private sector economy continuing apace. Dr Chalmers has been quick to claim the soft economic conditions justify the government’s continued high spending. He dismisses calls for greater budget discipline as a call for austerity. This is a misunderstanding of the contribution being made by government to high interest rates and low consumer confidence. Real austerity will come if Labor’s tax-and-spend agenda is allowed to fully run its course.