In this budget Jim Chalmers aspires to secure an election win and unveil modern Labor’s new character.
Forget the orthodoxy. Labor now operates under new rules – it is spending money to cut inflation, runs an expansionary fiscal policy as the central bank frets over interest rates and ditches two generations of pro-market liberalism to build a new economy around state intervention and green industry policy.
This budget is loaded with danger, short and long-term, the risk being it is the wrong response for the economic times. Chalmers is making a calculated gamble with Labor’s economic credentials. He may prevail but it’s a gamble, no risk.
But the budget is also a watershed. Chalmers is doing it his way. Chalmers is the intellectual force that defines this government. In this budget Chalmers repudiates Keating’s legacy but duplicates Keating’s ambition. The burning question being: will it fly or crash and burn?
Labor’s true self is revealed. It is ambitious, audacious, potentially reckless and has a long-run trajectory for Australia’s economy based on a new notion of comparative advantage. Chalmers third budget has two priorities – putting Labor on the political offence with a vast agenda to cushion the cost-of-living demon and then his re-direction of Australia’s economy with $24.3bn on new net zero measures and $22.7bn on a ‘Future Made in Australia’ over the decade.
At a time when most people are struggling the budget tries to make nearly everyone a winner – a tax cut for every taxpayer, power bill relief for every household, better aged care support, boosts to rental assistance, reductions in student debt, cheaper medicines and more funds for housing.
The upshot is far bigger budget deficits over the next four years. Back-to-back budget surpluses disappear into $112 bn of accumulated deficits out to 2027-28 with total policy decisions since the mid-year review costing $9.5 bn in 2024-25 and $24 bn over the four years. The longer run projection is for a bigger spending, higher taxing Australia with Labor looking to government direction in shaping the nation’s green-orientated industrial base.
This budget makes the Reserve Bank’s inflation fight more difficult. In this sense it has chosen to prioritise politics over economics. The bank’s narrow interest rate path has just got narrower. The larger $28 bn deficit in the coming 2024-25 election year will pile pressure onto demand, driven by cost-of-living relief and what the budget papers call “unavoidable spending”.
But the Treasurer rejected the claim the budget was expansionary and reinforced his insistence it was disinflationary. The war over the economics of the budget will be intense. In both the short-term and longer-term Chalmers is break with economic orthodoxy.
“Inflation is expected to be lower, sooner,” the Treasurer said. De-coded, Labor is meeting its responsibility. But this arrives as an enigma wrapped in a riddle - energy bill and rental support is calculated to cut headline inflation by 0.5 percentage points in 2024-25 while the subsidy just frees up funds to be spent elsewhere putting pressure on underlying inflation.
A conga line of economists have demolished the Chalmers’ line. The lessons are that Labor remains attached to its traditional model of mobilising votes via spending budgets- but budget are going to get a lot harder from this point as the commodity bonanza falls away.
Fiscal orthodoxy prescribes a neutral or contractionary budget to combat inflation but election year politics meant this was a bridge too far. The upshot is that Chalmers is tackling the symptoms but not the sources of inflation. He may get away with this – but it’s a big risk.
As a consequence from this budget Chalmers assumes political responsibility for any future punitive decisions coming from the Reserve Bank. The Treasurer might find the bank does not perceive the same anti-inflationary bonus in the budget that he does. In its recent Monetary Policy statement, the bank warned that with inflation expected to be above the target range for four years the risk was inflation expectations “would lock in a rate of inflation and nominal wages growth that is persistently higher with no benefit to real wages.”
The conflict between politics and economics runs everywhere in this budget. Its essence, however, is its dual identity. The budget is about a short-term political fix while offering, in the long-run, a radically different economic vision for Australia. It seeks, in Chalmers words “to forge a new economy.” That’s all.
Chalmers seeks to plug into what he calls “the biggest transformation in the global economy since the industrial revolution.” This budget is the launch document to make Australia into a renewable energy superpower. No treasurer has propounded such an ambition before. Labor’s long attachment to emissions reduction has evolved into a transformed economic and industry policy for the country.
Chalmers highlighted $13.7 bn in production tax incentives for green hydrogen and processed critical minerals. He said the $22.7 bn ‘Future Made in Australia’ package “will help make us an indispensable part of the global economy.” This is a massive government-directed gamble on the nation’s future. It shows Labor thinks big. But vision without implementation is useless and this vision is loaded with danger.
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