Tight spending, growth key to sustained budget repair

A week ago, coinciding with the release of cabinet records from 2002, John Howard and Peter Costello rightly urged the major parties to make deficit and debt reduction a major priority to avoid Australia remaining vulnerable to another economic crisis or pandemic. For that reason, and because interest payments on national debt are the fastest-growing area of government expenditure, The Australian welcomes Jim Chalmers’s commitment to make fiscal repair a key focus of his second budget in May. At a time of international uncertainty, demanding greater defence spending, including the new fleet of nuclear-powered submarines under the AUKUS pact, the Treasurer also faces soaring costs from the NDIS, health, aged care and the transition to cleaner energy.

Australia begins the year from a good starting point, as Dr Chalmers writes on Monday, with historically low unemployment, the beginnings of wages growth and strong terms of trade. At the same time, the economy is buffeted by the war in Ukraine pushing up energy prices, China’s transition from Covid zero, economic turbulence in the advanced northern hemisphere economies, higher interest and more frequent natural disasters. His aim, he writes, is to “put the budget on a more sustainable footing”, with inflation remaining the government’s “dominant concern, even on the other side of its peak”. The Expenditure Review Committee has been working with cabinet colleagues over summer to plan and shape the budget. The nation was “more vulnerable than we’d like to be to international shocks”, he admitted. Dr Chalmers is also “realistic about the prospect of another global downturn and what that means for us” after last week’s warnings by the International Monetary Fund that a third of the world would fall into recession in 2023.

In response to Dr Chalmers’s concerns, experienced economists Chris Richardson and Warren Hogan both urge action on spending and tax, including scrapping the legislated stage three tax cuts, to help the repair process. We disagree with the latter. The cuts, devised by the Coalition to be the most significant reform to personal taxation since the advent of the GST, would take Australians closer to the flatter personal tax rates that would leave more of what workers earn in their pockets, creating incentive and reward for effort. By eliminating an entire tax bracket and ensuring about 95 per cent of earners faced a marginal rate of no more than 30c in the dollar, stage three would lessen the insidious, debilitating problem of bracket creep. The 37 per cent marginal rate would be abolished, with taxpayers earning from $45,000 to $200,000 paying a single top marginal rate of 30 per cent. The change would boost the productive economy, reversing years of bracket creep. Nor would it make the system less fair. It would remain highly progressive, with the top 5 per cent of income earners continuing to pay a third of the overall income tax burden. Scrapping the promise would not be easily forgiven by voters.

Reducing spending is essential. While the government is locked in to cost-of-living help with electricity bills, higher wages for aged-care workers, and cheaper childcare from July, uncosted, open-ended measures such as replacing gas-powered home appliances for eligible households with electrical appliances, a concession to the Greens, must be firmly capped.

We agree with Mr Richardson that both sides of politics have underestimated the costs of social services. As he says, “our national compact is more expensive than it used to be”. He is also correct that with booming commodity prices set to deliver a small, temporary surplus for the 2022 calendar year before a rapid budget deterioration, the politics of justifying fiscal repair will be difficult. Budget repair will take sustained, long-term effort, assisted by productivity, confidence and investment generating greater revenue.