In our attempts to understand budgets, we too often fall into the trap of obsessing over details. These documents are best understood as statements of economic and political intent, not as purely accounting exercises.
In order to properly assess a budget, we need to consider the economic, fiscal and international circumstances confronting the government, and ask ourselves whether it represents a credible response to these.
Let’s start with the economic backdrop. Since the election of the Albanese government, we have had persistently high inflation (fuelled by excessive public spending, which has accelerated this year), productivity has gone backwards, economic growth has slowed to a crawl and living standards have collapsed, with average real disposable incomes shrinking by 8.3 per cent, far more than in any other developed country.
Yes, unemployment remains low, but in the absence of private sector-led growth, this cannot be sustained.
Our fiscal position is no better. Jim Chalmers has been the beneficiary of strong commodity prices and an acceleration in bracket creep – temporary factors providing cover for his breakneck spending.
But our long-term fiscal position is not sustainable, despite what our fictional official projections tell us. They suggest we will run surpluses in a decade, with net public debt stabilising at just under 20 per cent of GDP (and gross debt at 30 per cent).
But they rely on a decade of bracket creep to do the heavy lifting, with the average personal income tax rate set to rise from 24.6 per cent in 2024-25 to 28.2 per cent in 2034-35, by far the heaviest burden the community has ever faced. (All figures quoted here are from the Parliamentary Budget Office, which uses the same economic assumptions that underpin the budget).
The projections make wildly unrealistic assumptions about future spending pressures, including from the NDIS, defence and (the catch-all category of) government grant programs and departmental expenses.
As the PBO has shown, if we adopt a more realistic view of the world, we face permanent deficits and escalating debt. If we decided today to shield income taxpayers from bracket creep (by indexing our thresholds to inflation), assume NDIS costs grow by 10 per cent each year (not 8 per cent) and make more realistic assumptions about other government expenses, we are looking at a 2034-35 deficit of close to 3 per cent of GDP, with no end to the red ink in sight. This also assumes no increase in our projected military spending in 2034-35.
It’s time we realised that we cannot afford to retain the NDIS in its current form, eliminate bracket creep and lift spending on our military (I would not support the latter until we tackle the appalling waste and mismanagement in this part of government). Hard decisions have to be made now, not later.
The PBO estimates that indexing our income tax thresholds to the CPI today will cost 1.5 per cent of GDP in 2034-35, almost two-thirds the assumed (2.3 per cent of GDP) cost of the NDIS at that time.
Let’s not forget, too, that if future governments persist with their net-zero fetish to 2050 – a major and escalating self-imposed tariff – our likely future growth rates will be lower, worsening our baseline finances more still.
This dire picture takes no account of the effect of foreseeable global trade or security crises on our public finances. Nor does it consider the implications of the growth of off-budget spending, which has increased substantially under this government.
We have a faltering, inflation-prone economy that is unable to provide rising living standards for the community. We face either a future fiscal crisis or income tax revolt – or both – with no credible check in place on the growth of government spending. And we live in a far more dangerous world.
How will Chalmers respond in Tuesday’s budget? He will almost certainly persist in his policy of complete denial, spending recklessly and blaming international factors for his own weakness and incompetence. I wager that not one single courageous decision will be made.
The $1.8bn energy bill rebate extension announced at the weekend is typical of this government’s irresponsibility.
It is not means-tested, so goes to every household regardless of income; this is a ruse to manipulate the headline inflation rate down, when in fact it will have the opposite effect.
Peter Dutton’s budget reply speech is a golden opportunity for him. He should announce that he will end bracket creep for good – just as the US, Canada, Germany and many other OECD countries have done – funded by credible spending cuts, to limit the policy’s short-term effect on inflation.
As a cost-of-living intervention, it would trump Anthony Albanese’s litany of taxpayer-funded giveaways. Let the election be a referendum on this. Scrapping net zero would complement this move while raising the economy’s growth potential, but I doubt Dutton will go there.
If Dutton is bold, he should also commit to a major reduction in personal income tax rates across the board, not just for low-income earners. This should be financed by a big reduction in the size of government to be achieved over a number of years. The detailed package could be put to voters in 2028.
This tax strategy would take a leaf out of Bob Hawke and Paul Keating’s playbook. In 1985, they cut the top marginal rate from 60 to 49 per cent, funded largely by spending restraint, as Keating made clear at the time (with tax base broadening playing a secondary role).
Hawke and John Howard, our two greatest prime ministers, knew that when the fiscal footprint of government is scaled back, taxes can be lowered in a sustainable way, boosting investment, savings and growth, and expanding the economic pie for all.
They rejected the high-tax, high-spending philosophy of Gough Whitlam which hit working-class Australians the hardest and ultimately made us all poorer.
Dutton needs to give voters a compelling reason to support him. Being a small-target leader at a time of growing economic, fiscal and security risks, will simply not be enough.
David Pearl is a former Treasury assistant secretary.
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