Budget 2022: Treasurer Jim Chalmers warns of deep spending cuts, more taxes

Jim Chalmers warns of energy price hikes of up to 56 per cent and a two-year freeze in real wages.

Treasurer Jim Chalmers arrives to deliver the Albanese government's first budget in the House of Representatives at Parliament House in Canberra on Tuesday. Picture: AAP

Jim Chalmers has warned Australians to brace for energy price hikes of up to 56 per cent and a two-year freeze in real wages as the federal budget is hit by an ­explosion in costs to service the NDIS and the interest bill on the national debt.

The Treasurer laid the ground for deeper cuts in the future but provided no additional cost of living support for struggling households other than existing policies offering cheaper childcare and medicines that won’t begin until next year.

Delivering Labor’s first budget since 2013, Dr Chalmers told The Australian it was yet to be ­determined how the government would tackle the structural deficit but signalled there would be a combination of new taxes and spending cuts.

“We’ve always seen this as the first of three or four budgets this term,” Dr Chalmers said.

“We set that up deliberately. We’re putting the foundations down. There’s an element of conditioning people to understand that we’ve had budgets for a really long time now where there hasn’t been a savings effort.

“There hasn’t been an effort to return commodity-fuelled revenue upgrades. We’ve made a good start because we’ve done something different in those revenue upgrades; we’ve done something different on savings. That’s a good start.”

The budget papers paint a pessimistic debt and deficit picture over the decade, with $11bn in higher deficits expected in 2024-25 and 2025-26. As a proportion of GDP, the deficit is worse in 2032-33 than the current financial year. Treasury also warns the nation risks falling into recession should key budget assumptions prove too optimistic, with growth slumping to just 0.75 per cent next financial year if inflation peaks one percentage point higher in December or the global downturn is more severe.

Treasury warned of a double whammy effect, noting the downside scenarios for both growth and unemployment from higher inflation at home “would be greater if these risks occurred simultaneously with global risks”.

Treasury expects sharp spikes from 2026-27 in the cost of the ballooning NDIS and servicing debt, which will peak in mid-2026 at $1.16 trillion or 43.1 per cent of GDP.

In a shock for households and businesses, retail electricity prices will increase by an average of 20 per cent nationally in late 2022 and a further 30 per cent in 2023-24. Domestic wholesale gas prices will remain more than double their average prior to Russia’s invasion of Ukraine, with retail gas prices increasing by up to 20 per cent in both 2022-23 and 2023-24.

The budget said electricity and gas prices were expected to ­directly contribute 0.75 per cent and one percentage point to inflation in 2022–23 and 2023–24 respectively.

Dr Chalmers said the government would take action in the market to keep prices lower.

“Any responsible government facing these sort of price hikes needs to consider a broader suite of regulatory intervention than they might have considered in times gone by,” he said.

Peter Dutton said millions of Australians would pay the price for a “big-taxing, big-spending” budget. The Business Council of Australia, Australian Chamber of Commerce and Industry and Australian Industry Group said more must be done to drive economic growth and tackle structural spending pressures.

Rental costs will jump “considerably” in the next two years and fuel inflation amid stronger population growth and limited housing stock. A new housing accord between governments, investors and ­industry announced by Dr Chalmers on Tuesday, backed with an ­initial $350m pledge, has an ­ambition of building “one million new, well-­located homes over five years from 2024”.

Dr Chalmers said the accord must be driven by the market, ­despite concerns that cashed-up superannuation funds will struggle to deliver investment returns for members.

Finance Minister Katy Gallagher, whose pre-budget audit slashed $22bn from Coalition-era programs which were redirected to fund Labor policies, told The Australian the trajectory of budget pressures were “keeping her up”.

Senator Gallagher’s audit sets up a fight with Nationals and ­regional Liberal MPs after the budget canned dozens of ­Coalition projects and grants programs and redirected a chunk of $6.5bn in infrastructure savings to climate change projects.

In his first budget speech, Dr Chalmers told parliament that 92 per cent of the $132.5bn in upgraded tax receipts over the next four years had been banked.

But the budget sugar hit, which cut the 2022-23 deficit by $41bn to $36.9bn, is expected to unravel ahead of the 2025 federal election as unemployment and inflation spike and wages and economic growth stagnate.

Compared with the pre-election fiscal outlook, Labor’s policy decisions have added $9.7bn to the budget bottom line. Treasury projects tax-to-GDP levels of 24.1 per cent by 2032-33, which ends the Coalition-era policy of maintaining taxes within a 23.9 per cent tax-to-GDP cap.

Dr Chalmers painted a grim outlook for Australians who “know there are hard days to come and hard decisions to accompany them”, as Russia’s war in Ukraine, China’s slowdown, higher interest rates and inflation bite. He released a “five-point plan for cost-of-living relief” amid growing political pressure on Labor to deliver on their promises to slash $275 from electricity bills by 2025 and lift wages.

The $5.4bn changes to childcare subsidies start from July next year, cheaper medicines from January and the full paid parental leave scheme from 2026. Labor’s five-point plan also includes “more affordable housing and getting wages moving again”.

In his speech, Dr Chalmers lamented that real wages were lower now than 10 years ago.

“Wages are growing faster now than they were before the election, but that welcome news is tempered by rising electricity prices and grocery bills eating into pay packets,” he said.

“When that inflation moderates, real wages are expected to start growing again in 2024.

The Opposition Leader said the budget did “nothing to assist your family budget”. “Millions of Australians will pay the price for a big-taxing, big-spending budget,” Mr Dutton said.

BCA chief executive Jennifer Westacott said there were “tough decisions ahead” and the budget did little to drive economic growth. Australian Industry Group chief executive Innes Willox said the budget risked “tinkering at the edges of Australia’s structural economic challenges”.

Dr Chalmers said: “We’ve been pretty clear with people that we think if you splash too much cash around in the near-term you make inflation worse. When people are doing it tough, there are legitimate calls to provide support but our responsibility is to do it in a way that doesn’t add to the main problem that we have in the economy which is inflation.”

He said the government had shown spending restraint, cracked down on multinationals and offset expenditure with revenue and savings windfalls.