Red ink a bad colour in federal and state budgets

The expectation that forecast budget deficits will deepen over the next four years, as the Albanese government lifts spending and delivers greater taxpayer-funded investment into future drivers of economic growth under its Future Made in Australia agenda, is deeply concerning. That approach flies in the face of the need, post-pandemic, to retire debt, slash government interest payments and build up reserves to cope with future economic shocks. And it comes after a timely warning from former Reserve Bank governor Glenn Stevens last week that the nation’s path back to low inflation is “not yet” secure. Tuesday’s Reserve Bank board meeting could reveal concerns about the persistence of price pressures, underlining why Jim Chalmers should cut spending in the May 14 budget.

Inflation would be the “primary focus’’ of the budget, Finance Minister Katy Gallagher told ABC television on Sunday, but she said savings were “increasingly difficult” to find. That is debatable, given the extent of Labor’s social spending, including its failure to contain the ever-expanding National Disability Insurance Scheme, taxpayer-funded pay rises for aged-care and childcare workers outside the public sector, and extra maternity leave costs.

The Treasurer is likely to reveal a wafer-thin second surplus for 2023-24, national affairs editor Joe Kelly reports. But a surplus will be accompanied by a deterioration in the budget position over the next four years, despite estimates the government is expected to rake in an extra $25bn in revenue over the forwards. That deterioration, in part, will be exacerbated by budget sweeteners under the guise of cost-of-living relief and other handouts. Trainee teachers, nurses and ­social workers will be paid up to $8307 to learn on the job in schools and hospitals, Natasha Bita reports, while the government will also wipe $3bn from outstanding HECS-HELP debts for more than three million university graduates and students. Graduates with an average debt of $26,500 will have $1200 wiped from their outstanding loans and recent graduates with debts averaging $45,000 will have $2000 cut. The measure was included in the Australian Universities Accord in February. In an extraordinary concession, it will be backdated to June last year. Wiping debt retrospectively is unprecedented, economics professor Bruce Chapman, a founder of the HECS system, said. It is geared to winning votes among young people and their families, and is an early campaign salvo for the election due this time next year. But it will not help the budget bottom line.

As a model of what not to do, the commonwealth and other states should look to the fiscal position of Victoria, where economists warn the Allan government has no alternative but to apply the brakes to spending on major projects such as the Suburban Rail Loop in its budget on Tuesday. After decades of big government, big spending and high taxes, mainly under Daniel Andrews, the reckoning has arrived. By 2027, almost $250bn of an expected $600bn in collective state debt in Australia – 42 per cent – is expected to be attributable to Victoria, S&P global ratings director and lead analyst Martin Foo warns in these pages. Australia’s collective state debt is rising proportionately faster than in most advanced economies, including Canadian provinces and German states, he notes, blaming the rising sea of red ink nationwide on the “infrastructure binge” that is about 1.7 times the size of the Marshall Plan that rebuilt post-war Europe. Dr Foo identified inflation, rising labour costs and “a tendency to commit to projects prematurely before they’re fully scoped” as problems. So is waning budget repair discipline, growing public service headcounts and cost-of-living subsidies. Such factors should be addressed, including foolhardy bribes such as the $1000 energy rebate Queensland Premier Steven Miles is doling out, un-means tested, to every household from July 1, to coincide with the October election.

The price of populism, however, is ultimately higher tax and, in current conditions, persistent inflation, adding greater interest rate pressures to business and household borrowers.