Harden up, Trump’s global disorder is coming at us fast
Since the start of the year, the Prime Minister has been traversing the nation like a cheery uncle dealing out First Holy Communion cards stuffed with cash. But we need to get our fiscal house in order to survive Donald Trump’s made-in-America turmoil.
Next Tuesday’s budget arrives shrouded in an off-Broadway aura, with Jim Chalmers uncharacteristically sapped and subdued before showtime. Labor is cruising on plan B, having run policy previews in selected theatres while saving its 11 o’clock number for the coming election campaign.
The Treasurer says there will be fewer surprises in a budget prepared mostly in the usual way but signed, sealed and delivered in haste. Labor’s chief economic marketer insists his fourth budget will be a responsible one, “which helps with the cost of living, builds our future, and makes our economy more resilient in this new world of global uncertainty”.
Resilience is back as a motif, aspiration and rhetorical crutch; while the world keeps changing on us, the policy imperative remains the same. We need to get our house in order, with fiscal sustainability the bedrock of pretty much everything required to make our economy bigger, dynamic, innovative, flexible and more productive.
Building a stronger and more resilient economy was the spirit of Labor’s initial fiscal moves in October 2022, which came eight weeks after its Jobs and Skills Summit: cheaper childcare, skills development, industry policy and workplace relations. The words resilient or resilience were used 10 times in the Treasurer’s first budget speech.
His next effort in May 2023 was about resilience in the face of global challenges, such as the big inflation, rising energy and food costs, and higher interest rates. Although Chalmers pumped in a hefty spending boost, he kept the budget balance in the black.
In 2024, the threats had changed, so resilience was all about Anthony Albanese’s Future Made in Australia program, with Treasury-made guardrails in place to make sure taxpayer funds weren’t squandered.
But 10 months on, the risks to our prosperity and security are broadening and deepening due to the force multiplier of Donald Trump’s chaotic mercantilism: Tariffs ‘R’ Us. Now there’s talk of a Big Pharma shakedown on our cheaper medicines as anxiety builds ahead of the US President’s April 2 T-Day when new reciprocal imposts begin.
Chalmers says the nation’s response “will not be a race to the bottom on tariffs”. “We’ll go for more resilience, not more retaliation,” he told the Queensland Media Club this week, echoing the advice of his officials.
What does that look like? Treasury secretary Steven Kennedy told the Senate in February building our resilience in this wild world involved “implementing and maintaining policies that underpin our market-based economy, and ensuring fiscal policy is sustainable while investing appropriately in our defence and security”.
So the test on Tuesday night for the Treasurer’s annual fiscal extravaganza is not only getting the budget “in better nick”, to use the custodian’s vernacular, but to ensure that in Australia we make capitalism great again.
Senior players in Canberra, past and present, generally agree Chalmers made a solid start in his first budget. As the nation roared out of Covid lockdowns, with consumers on a post-pandemic splurge and foreigners flooding back into the country in record numbers, (after inflation) spending was cut by 5 per cent; revenue upgrades were used to reduce debt and interest costs.
But “the rot has set in”, as one high-level observer put it to Inquirer; Labor has locked in forever spending amid a fleeting boom in revenue – not the first government to fall into this trap.
Since the start of the year, the Prime Minister has been traversing the nation like a cheery uncle dealing out First Holy Communion cards stuffed with cash. Expect more fanfare when Albanese springs his legacy-defining pitch to implement a universal childcare scheme with a flat-fee structure. A third straight surplus this financial year was feasible, even after the tax cuts from July 2024, but the government opted for everyone, everywhere getting a prize: more rent assistance, energy bill rebates, reduced higher education debts, support for small business, care sector wage rises, a fund to build childcare centres, cheaper medicines, clean energy and infrastructure booster shots, and a lower deeming rate for retirees.
The December 2024 budget update showed that on Labor’s watch half of the $378bn in revenue improvements (over the pre-election four-year profile) had been spent on new things.
And the binge goes on, with student debt forgiveness, extra schools funding, bulk-billing incentives for GPs, cheaper medicines, highway upgrades, enhanced access to early childhood education and most likely an extension of energy rebates for households. As well, the Whyalla steelworks bailout has spooked the capital’s economic brains. How does that fit into the national interest framework that is meant to protect taxpayer funds from dud deals and cradle-to-grave handouts?
As the nation heads to an election, we are facing a decade of budget deficits, a $100bn splurge in off-budget larks (from the National Broadband Network to Snowy 2.0), rising debt and a defective fiscal setting that will eat up more personal income tax via bracket creep.
Commonwealth Bank chief economist Luke Yeaman says while there will be pressure to loosen the purse strings further on Tuesday, “too much spending risks undermining claims of ‘responsible economic management’ and giving the Reserve Bank a potential excuse to delay further interest rate cuts”.
The former senior federal Treasury official notes “the appetite to deliver substantial structural savings, tax changes or other productivity-enhancing reforms this close to an election will be very limited”.
“That said, pressure will build in the next term of parliament – whoever wins the election – to lay out a more ambitious growth agenda, tackle rising spending in disability, aged care and defence, and address the rising tax to GDP ratio,” Yeaman wrote in a pre-budget analysis.
The official 10-year projections of a return to budget balance are based on no new crises or enforced spending priorities (such as defence) or even the seismic structural changes afoot in a new global order. A joint research report by the e61 Institute and UNSW Sydney highlighting the policy challenges for the next parliament boils down the options for fiscal sustainability: grow faster, tax more, spend less, and/or inflate away public debt.
“The current political approach by all sides has been to lock in ongoing spending and hang on to bracket creep and upside surprises in iron ore prices to boost revenue,” the report says. “This is likely far from the optimal policy mix.”
Although our debt-to-GDP ratio is low compared with OECD peers, the report says “the direction of travel is concerning”. For instance, despite the all-round welfarism of John Howard’s emphatic redistributions, Australia became renowned for its tightly targeted social assistance, such as unemployment, pensions and family payments. Yet analysis by e61, where I work as an adviser, shows Canberra has decreased its reliance on the means-tested transfer system in favour of in-kind services such as aged care, childcare and the NDIS, which are less restrictively targeted. Last financial year, for the first time, spending on these fast-growing in-kind social services was higher than on benefit payments.
In its latest economic outlook, the OECD predicts global carnage from Trump’s trade assaults: weaker growth and higher inflation; it downgrades Australia’s GDP growth next year by more than any other G20 nation except Canada and Mexico, two countries in the US tariff vortex. The Paris-based research body also highlights how our public debt as a proportion of GDP has, albeit from a low base, quadrupled over the past two decades.
The OECD advises its rich member countries that today’s tight fiscal positions demand thorough reviews to help rejig spending “towards activities that support longer-term growth”. “Steps to eliminate distortive tax expenditures, upgrade tax administrations and raise a higher share of revenues from indirect, environmental and property taxes would make the tax system more supportive of growth in many countries,” it says.
There’s a lot of political pain in that prescription, and likely losers in the short term, but also a lot of upside – not least of which is equity for younger Australians and being able to fund the health and lifestyles of boomers and Gen X in the decades ahead.
We also need to restore fiscal rules, such as the ones Labor established in the wake of the global financial crisis. Nothing flash, of course, but more than the Treasurer’s flimsy mission statement that’s as durable as scribbling on a whiteboard. Whoever wins in May should cap real growth in spending to 2 per cent a year on average until the surplus is restored to 1 per cent of GDP.
You could get a lot fancier, but just this simple edict would be a decent baseline.
There are many good ideas in the public square pre-poll about how to make the nation more productive and resilient. The Grattan Institute’s blockbuster Orange Book, published this week, has sensible proposals to build prosperity through all the big-ticket areas: tax reform, net zero, housing, skilled migration, school education, health and retirement incomes.
The business lobbies have provided boilerplate guides about reducing regulation and boosting investing. Even the Coalition has taken a break from its junk policy rollout and hourly platform shape shifting to offer a helpful idea: a taskforce led by the Productivity Commission to review regulations, quantify their cost, and abolish red and green tape that prevent us building homes, roads, rail lines and data centres at a reasonable cost.
Opposition Treasury spokesman Angus Taylor concedes that in building codes and workplace laws, for instance, “many of these interventions had good intentions but they failed to account for second-order effects”.
“We have a choice: accept these as the status quo,” he told a business summit this month. “Or commit to making the changes that are necessary to achieve our economic potential.”
Like the Treasurer, Taylor has a wonk’s grasp of the bite-sized reforms necessary in competition policy, foreign investment approvals and prudential rules to lift productivity growth. “In isolation, many of these solutions may not sell newspapers,” he said. “In aggregate, they are integral to our future economic prosperity and our living standards.”
But neither of these economic literates has managed to win over their populist leaders or partyrooms on a fresh policy agenda, let alone sell a message of disruptive transformation to the public during a cost-of-living crunch. Far from it, as both Albanese and Peter Dutton up the ante in a reckless cash splash that will get us further in debt, make life more difficult for the RBA and borrowers, and delay the repairs to our economy’s engine.
Perhaps things will have to get a lot worse than our current stagnation in living standards and national drift; so much so that extraordinary measures will be required or imposed on us. At a time when there’s next to nothing in the federal kitty to “buy” reform or cushion the coming blows from a world that loves us a lot less, resilience looks like the age-old “suck it up, Australia” and batten down the hatches.
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