Labor’s ‘big and busy’ government spree means higher taxes
It might be the Prime Minister’s last stand, but taxpayers be warned: the big spending era will roll on.
Anthony Albanese and Peter Dutton are locked in a “rage in a cage” political fight to the death. This week’s lacklustre Senate inquisitions and the party leaders’ frantic excursions in the wilds of voter land tell us the 47th parliament has effectively run its course. The formal campaign cannot be far away.
No matter who prevails in the 2025 federal election, the era of freewheeling spending, structural budget deficits, industry handouts, and bailouts and intervention in markets the Prime Minister has supercharged will roll on. It’s a variant, with due allowances for scale and temper, of Bidenomics, with its foot-to-the-floor “hot economy” setting, clean energy subsidies and revival of manufacturing.
A scorching critique by former Obama administration top economist Jason Furman of how US Democrats tragically lost their bearings under Joe Biden serves as a warning. Writing in the current issue of Foreign Affairs, the Harvard economics professor argues Democrats discarded the orthodoxies of budget constraints, trade-offs and cost-benefit analysis, thus succumbing to a “post-neoliberal delusion”.
“The Biden administration failed to seriously reckon with budget constraints and to contend with the effects of ‘crowding out’, when a surge in public sector spending causes the private sector to invest less,” Furman writes in The Post-Neoliberal Delusion. “Both missteps reflected a broader unwillingness to contend with trade-offs in economic policy and allowed Trump to ride a wave of discontent back into the White House.”
Furman warns it would be a mistake for Democrats to think “their loss was due solely to a global backlash against incumbents”. Even worse, and this is a trap for Albanese Labor, to conclude that voters had simply been insufficiently appreciative of everything Biden did for them.
A week ago, Albanese moved to wedge his opponents on Medicare via $8.5bn in new bulk-billing incentives for GPs. The Coalition’s me-too lunge (with another $500m for mental health) gives the game away. That’s before we get to the special crossbench deals that await the party that clinches the most seats to form a minority government, still the likeliest outcome.
The pre-campaign promises have been racking up since the start of 2025 like it’s Albo’s last stand tour, with the Prime Minister in full Barnesy mode rollicking around the country. Labor has announced $7.2bn for Queensland’s Bruce Highway; a $3bn equity boost to upgrade the fibre on the NBN; $2bn to decarbonise aluminium smelters; $1.7bn for Canberra’s share of the ($2.4bn) bailout of the Whyalla steelworks in South Australia; and an extra $2bn for Melbourne’s airport train service.
More energy bill relief is expected ahead of the election, given the $300 federal rebates expire in June. Westpac senior economist Justin Smirk forecasts prices could rise by another 30 per cent by the end of the year if existing state and federal energy rebates are not extended.
The national credit card will be tapping and going to hell in a handbasket. Without offsets, that means higher taxes. Or, as the Opposition Leader has kind of indicated, a 36,000 reduction in Canberra’s headcount that would save $6bn a year. Or, most likely, higher deficits and rising debt-interest payments.
Independent economist Chris Richardson says since being elected in May 2022, the Albanese government’s official figures (up to December’s mid-year budget update) show its decisions have added a net $31bn to spending in this financial year alone; across the fiscal journey (until mid-2028 when the forward estimates period ceases) he calculates the spending uplift from Labor’s policy decisions is close to a cumulative $140bn.
That figure does not include wage increases for care workers that were championed by the Albanese government but were mandated by the Fair Work Commission. As well, this does not take into account Labor’s off-balance sheet adventures, from housing to rewiring the nation and forgiving student debt. By the way, the Coalition’s proposed government-owned seven nuclear power plants, a pricey move still in Fantasy Football draft mode, will also reside in this opaque fiscal domain.
When taxes have to go up in Australia, “the simplest way to do that is for politicians to let wage inflation push people up into higher tax brackets”, Richardson tells Inquirer. “So how much does our extra spending imply in terms of extra personal tax? Given the pace at which wage growth pushes us into higher tax brackets, the spending of recent years implies that we’ve already pushed back the arrival of the next tax cut by another five or six years.”
According to analysis by Reserve Bank economists, after strong growth early in the pandemic (because of stimulus payments for workers and small business) higher taxes are eating into household disposable incomes. The cumulative per capita deterioration (after inflation) has been 1 per cent.
“This has been among the weakest periods of real income growth since the 1960s and has occurred alongside a period of historically weak productivity outcomes,” the RBA’s quarterly Statement on Monetary Policy says.
No wonder voters are grumpy about the squeeze on all fronts by high living costs and the central bank’s restrictive monetary policy.
After inflation, labour income has grown by four percentage points across the past five years, but this has been more than offset by a five percentage point drop in disposable income because of lower “gross mixed income” (mainly small business earnings), higher interest rates and higher tax payable.
The growth model of free trade, balanced budgets, productivity-led income accumulation and strong markets that served Australia for four decades is under siege – from without and within.
Furman’s tour de force essay dissects the Biden administration’s retreat from the economic policies of the Clinton and Obama years, which were seen as “too focused on free trade, too timid on deficit spending, and too reliant on the welfare state to fix the gaps left as a result”. You can see a similar yearning for this new “post neoliberal” era in the reinventing capitalism screed from Jim Chalmers two years ago and Albanese’s signature Future Made in Australia program.
In the US it was the Build Back Better agenda where, as Furman tells it, “massive public investment in infrastructure and the domestic economy would better position the country for inclusive growth and the clean energy future”. It did not deliver jobs or boost capital works.
We know societal ageing, disability services and interest payments are pushing up the nation’s running costs, but so is a deterioration in the security outlook, with senior figures in Canberra recalibrating their views on the fiscal trade-offs to come. Donald Trump’s tariff onslaught is unhelpful, not least the imminent specific instruments on aluminium and steel that we are trying to evade.
There’s a growing acknowledgment our defence spending will have to rise, not only because of the US President’s reliable unreliability but also because of the escalating risks in our region. As in the US, national security concerns are increasingly front of mind when policymakers make calls on trade, technology, budget, industrial and energy policy.
Treasury secretary Steven Kennedy warns global trade tensions may dampen business investment, posing risks to growth and employment. Even if tariffs are applied to our exports, let’s not shoot ourselves in the head.
“It will seem counterintuitive to many but responding to tariffs or trade restrictions with similar measures will only make matters worse,” he told Senate estimates this week. “But there are things we can do at home to build our resilience including implementing and maintaining policies that underpin our market-based economy and ensuring fiscal policy is sustainable while investing in our defence and security.
“As a medium-sized open economy, a trading nation, this will ensure we are best placed to weather any major global shocks.”
Plainly, the Whyalla bailout does not fit in that sensible framework, with its emphasis on policies that are responsible, rigorous and effective, or meet the fiscal sustainability test. Of course, it’s small-picture politics but at a big-ticket price point: $2m per direct job.
During questioning, Kennedy said a rise in defence spending would inevitably require governments to make difficult choices – implying higher taxes or lower spending on other desires – given the need for fiscal sustainability and a robust starting point when the next shock strikes. To be fair, we come from an enviable fiscal place compared with our debt-addled peer nations, but we’re moving in the wrong direction.
In Furman’s view, one of the key failures in economic thinking that soured the Biden era was the emphasis of demand over supply. Yet the data for the US consistently shows world-beating productivity and income growth. As a conga line of dismal scientists – from the RBA, Treasury and Productivity Commission – advised in recent days, our poor productivity performance, lack of innovation and inefficiencies over decades have held back the supply side of our economy. That means we can’t sustain strong levels of demand without igniting inflation and inviting a whack from the RBA.
At an event hosted by ambassador Kevin Rudd at our embassy in Washington, US Treasury secretary Scott Bessent sketched out America’s new plan to lift productivity, lower taxes, slash red tape, unleash cheaper energy and drive private sector jobs growth.
As my colleague in DC Joe Kelly observed, while Albanese has re-regulated the labour market, broken his promise to accept the stage-three flattening of the personal income tax scales, failed to bring down energy prices and courted criticism for not tackling a slide in productivity, Team Trump declares it is moving in the opposite direction. Let’s see how that goes.
And while we’ll hear a lot about productivity this and productivity that during the campaign, we’ll see little of the fresh policy – on tax, the labour market, regulation, migration or infrastructure – that could make a huge difference to our living standards. At best, they’ll chisel away at our chronic miseries.
As they barnstorm their way around the country, last stand Albanese and Dutton may struggle for a frontman’s charisma and stagecraft. But for Australians, unless we abandon our policy delusions, there ain’t no second prize.
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