Jim Chalmers’ cheques and imbalances put us back in the red
Australian taxpayers face a $50,000-per-minute interest bill as new figures show government spending has hit its highest level outside the pandemic since 1986.
Jim Chalmers has presided over the biggest ramp-up in spending as a percentage of GDP in 40 years outside the pandemic, registering an 8 per cent increase in spending in the last year alone, driving the Albanese government’s first deficit since coming to power and raising questions about fiscal discipline.
The Treasurer and Finance Minister Katy Gallagher said there were few areas where spending cuts could be made outside of energy rebates that “won’t be in there forever”, signalling that growth in spending is to remain high.
The final budget outcome for 2024-25, released on Monday, drew calls from a former Labor government economics adviser that spending growth needs to be curtailed starting in this financial year.
Both the International Monetary Fund and the Organisation for Economic Co-operation and Development warned governments last week that greater fiscal discipline was needed and that difficult budgetary decisions needed to be made.
The Albanese government’s total payments grew to $727bn in Treasury’s final budget statement covering 2024-25, pushing spending up 8 per cent on last year and jacking up spending as a percentage of GDP by a full percentage point to 26.2 per cent.
Dr Chalmers boasted that payments were $4.6bn lower than the March budget estimate by Treasury and said that the rate of spending was responsible.
“We try and do what we responsibly can and affordably can to help people with the cost of living and if you look at these figures that we’re releasing today I believe that we have struck an effective balance between getting the budget in much better nick at the same time as we cut taxes for people and help with the cost of living,” Dr Chalmers said in Canberra.
But former Gillard government economic adviser Stephen Koukoulous, now managing director of Market Economics, said now was the time to be erring on the side of “fiscal caution” and that the Albanese government’s rate of spending would have to come back down this financial year.
“I’m sort of okay with 8 per cent, just as long as next year it is substantially less,” Mr Koukoulous said. “Will it be or not? That’s the dilemma and this is where Jim and Katy have got to look at fiscal settings.”
Corinna Economic Advisory’s Saul Eslake said he was not “not comfortable” with the rate of spending and that the government might even have to take the politically unpopular step of raising taxes if it couldn’t cut spending.
“Our tax system is not commensurate with the rate of spending,” Mr Eslake said.
There is clearly public demand for spending on health and aged care and disability and childcare, but the problem is can you pay for this additional spending by cutting spending in other areas?
“It’s actually quite hard. The difficult decision might actually mean raising more revenue.”
The final budget outcome recorded that the government brought in $658bn in taxation receipts, $24bn more than last year. Some of the surprise upside was split between stronger commodity prices and better employment conditions, which grows the income tax pot. The tax-to-GDP ratio is 23.7 per cent, the equal highest since the global financial crisis in 2008-09.
Mr Eslake said Treasury’s overly conservative forecasts were clearly deficient.
“If a chief financial officer of a listed company gave such guidance as Treasury has given they wouldn’t be in the job long,” he said.
Westpac senior economist Pat Bustamante said Treasury’s forecast would probably be out by as much as $40bn and that spending
“Using Westpac’s commodity price forecasts instead of Treasury’s conservative assumptions, we estimate that tax revenue from mining is likely to be $40bn higher over the next five years than forecast in the March budget,” Mr Bustamante said.
“This will not be enough to cover higher spending, though.”
Opposition Treasury spokesman Ted O’Brien noted that Labor had been the beneficiary of a record revenue windfall, totalling more than $370bn over its first four budget years alone.
“Much of this is due to higher taxes via bracket creep on hardworking, everyday Australians,” Mr O’Brien said.
“Jim Chalmers won the lotto and immediately went on a spending spree.
“This year, government spending will reach its highest level outside of recession since 1986.
“We are spending $50,000 on interest every minute, which is money that can’t be spent on essential services.
“And it is all going on the national credit card for our kids to repay.”
Mr O’Brien reiterated his call for the government to reinstate “quantifiable fiscal rules”.
Earlier this year former Treasury secretary Ken Henry called on the government to reinstate fiscal rules under the charter of budget honesty.
Last week the Washington-based IMF issued a new global report, Fiscal Rules Foster Stability as Spending Pressures Grow, in which it suggested governments adopt fiscal rules to foster “fiscal discipline”.
Similarly the OECD said that impending fiscal pressures from ageing populations and climate change meant that “difficult budgetary choices are increasingly being felt” by governments.
Since the March budget the government has increased spending through subsidies to help achieve net-zero emissions targets and increased the deeming rate on pensions.
There have also been calls to cut energy rebates.
Members of Anthony Albanese’s welfare working group are pushing Labor to end its $6.8bn power bill rebates.
Dr Chalmers said he would review these payments. “When it comes to the energy rebates, they won’t be a permanent feature of the budget,” the Treasurer said. “We keep them under review from budget update to budget update. There’s obviously a mid-year economic and fiscal outlook to be released between now and when those rebates run out. They won’t be in there forever.
Australia’s largest accounting body, CPA Australia, remains concerned about the nation’s over-reliance on a shrinking pool of taxpayers and persistent expected deficits over the next decade.
“CPA Australia notes the better-than-expected improvement to Australia’s fiscal position,” said Gavan Ord, CPA Australia’s Business and Investment Lead.
“However, these results show the government remains overly reliant on company and personal income taxes.
“The proportion of Australians paying income taxes is declining as the population ages – they will shoulder an increasingly heavy burden unless the tax base changes.
“Although the final financial results for 2024-25 exceeded projections, Australia continues to face substantial budgetary pressures, with deficits projected to persist over the next decade. Strengthening our fiscal position remains an urgent priority.
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