The federal budget is in dire trouble, facing deficits of roughly $50 billion a year as far as the eye can see. Working Australians and their families are in dire trouble too, midway through an average 5 per cent cut in real wages — with no certainty if and when they will get it back, let alone get ahead of where they were in the days before Covid.
Bringing down a budget in this environment is tough work. Six months ago, during the campaign, Labor was blaming the Coalition for falling real wages: now it is in power and real wages are falling faster than ever, for reasons beyond any government’s control.
Six months ago Labor was ridiculing the Coalition’s economic management for deficits and debt: now it is in power, and has come clean and told us what the Coalition wouldn’t: that the budget, on realistic assumptions, is in even worse long-term shape than we thought.
Does this budget tackle those looming deficits? Yes, but only at the margins. It’s designed not to make them too much worse. In net terms, it adds another $10 billion to the expected deficits for the next four years, but most of that is in 2025–26, when inflation is forecast to be back in its box.
Does it do anything fresh to raise real wages or cushion the rising cost of living? No. Like the Reserve Bank, it accepts the consensus that governments’ most urgent task is to crush the unexpected resurgence of global inflation, and that takes priority over everything.
Well, almost everything. Net new spending in four years totals almost $23 billion, and item after item in the budget papers is introduced with the footnote: “This measure delivers on the government’s election commitment as published in the Plan for a Better Future.” Even the bad bits of the plan have been delivered, presumably to underline the message that Labor’s word can be trusted.
Treasurer Jim Chalmers had an unenviable task in framing this budget, and he got the big call right: fight inflation first. Part of the reason that our standards of living have kept rising over the past thirty years — the International Monetary Fund estimates that Australia’s real GDP per head has grown by 69 per cent in that time — is that the Reserve Bank has not needed to slow the economy to tackle inflation. It would not be in our long-term interests to allow this outbreak to become entrenched.
And Chalmers and Anthony Albanese are playing the long game. They don’t want a term in power to make changes, they want a decade in power to make changes. The first step is to gain credibility with voters so that they will support those changes. Rome wasn’t built in one budget.
But Labor came to power bearing diverse hopes and expectations from the 52 per cent of Australians who preferred it to the Coalition. This budget could disappoint many of them. Let’s look first at what Labor hasn’t done.
It hasn’t directly tackled the biggest problem facing Australian families: their falling spending power as a result of inflation far outpacing wage growth
The strategy the Reserve Bank and the government are using to beat down inflation is to reduce the spending power of Australian households. Inflation is best defined as too much money chasing too few goods and services. That is what has happened here. And now the Reserve Bank and the government are aiming to reduce the amount of money Australians have at their disposal.
Today’s figures from the Bureau of Statistics show inflation jumped to 7.3 per cent in the year to September, its highest level since 1990, and was spread throughout the dozens of items in the consumer price index. By far the biggest contributor was the cost associated with buying a new house (stamp duty, conveyancing fees and so on). We can blame that on the Reserve itself and the Morrison government: the Reserve for keeping interest rates too low for too long, and Morrison and Josh Frydenberg for trying to win re-election by throwing more and more money at voters.
Chalmers forecast that gas and electricity prices will rise over 2022 and 2023 in the order of 50 per cent, mainly because of the fallout from Russia’s invasion of Ukraine. Yet so far they’re way short of that. While household gas prices were up 16.6 per cent in a year, the Bureau’s data contradicts many of the inflation narratives we hear: it found electricity prices were up only 3.2 per cent in a year, and household rents up 2.8 per cent, while childcare costs were down 5.4 per cent. After home-buying costs, food, fuel and travel are the other main costs driving inflation.
The Reserve Bank is severely shrinking the spending power of mortgagees and others in debt by rapidly hiking its cash rate. That will push down home-buying costs and the loose spending that breeds inflation. But it also makes people poorer, and voters angry.
Chalmers amiably pretends that Labor is tackling the problem by delivering five campaign promises — higher childcare subsidies, expanded paid parental leave, more social and affordable housing, lower pharmaceutical costs, and workplace relations reforms — as “responsible cost of living relief.” In fact, all those commitments predated the current fall in real wages; they are neither designed nor able to offset those losses.
If the budget forecasts are right, by the end of next year many households will be significantly worse off. Treasury predicts prices will rise 5.75 per cent in the year to June 2023, on top of the 6.1 per cent rise in the financial year just ended. It forecasts that wages will rise 3.75 per cent in both years, but on Treasury’s past form and the latest data on wage growth, that could be optimistic. Even if it is right, real wages will fall 5.1 per cent over the two years. If it is wrong, they will fall even more.
To make matters worse, as the Guardian’s Greg Jericho reminds us, the low- and middle-income tax offset, a significant tax break for working households, was abolished by the Coalition from this financial year. Labor has chosen not to revive it, nor has it offered households anything new (post-election) to cushion the fall in their living standards.
It is important to understand what’s happening here. Jessica Irvine covers it well in today’s Age/SMH. Faced with a crisis affecting millions of people who voted for it, Labor has taken the high road of responsible budgeting rather than come to the rescue. That is a different way of governing from the opportunism of the Morrison government, and economists will hope it is proved right: that wage growth will rebound while price growth shrinks and few people get badly hurt. But politically, Labor is taking a big risk.
After five months in which Labor has been untroubled by the opposition, this opens up a real issue for the Coalition to exploit by demanding relief for households (which of course would have to be funded by taking on more debt, to be repaid by future generations). Shadow treasurer Angus Taylor is correct in saying there are many ways to do that. But given the chronically irresponsible budgeting of the Coalition’s last twelve years in office — the final three years of the Howard government and the entire nine years of the Abbott/Turnbull/Morrison government — you’d expect them to take that road.
This budget forecasts that future budgets will remain heavily in deficit, averaging 2 per cent a year, for at least the next ten years — but it puts off the task of fixing that deficit by serious tax reform
As promised in the campaign, Chalmers has plugged some of the loopholes used by multinationals and others to avoid tax. Treasury estimates that various anti-avoidance measures will raise $4 billion from multinationals and $2 billion from others over the next four years. But that’s only a small first step towards tackling budget deficits forecast at $182 billion over that time.
Similarly, Labor says it has saved or deferred $22 billion of spending over four years by scrapping or “reprofiling” Coalition programs, such as infrastructure investments and community development programs. But compared with the size of the deficits ahead, that’s puny. It’s a start, and it pays for some of the cost of Labor’s own programs, but politically, that’s the easy stuff.
Australia should not be running budget deficits at all when jobs are abundant and its mineral export earnings are at record levels. The budget rises and falls with mineral prices. Thermal coal and gas prices are now sky-high, so company taxes are now forecast to raise $127 billion in 2022–23 rather than the $90 billion forecast in April — and so Treasury now forecasts a deficit of $37 billion rather than the $78 billion forecast then.
Conversely, a key reason why Treasury predicts that deficit will rebound within two years to $51 billion, and then stay at that level in real terms is that it forecasts commodity prices to “glide down over the December 2022 and March 2023 quarters to their assumed long-term fundamental price levels.” Given the abrupt slowing in China and the Western economies that’s certainly possible. It’s also sensibly conservative.
Another reason for Treasury’s alarm about the budget’s future is that, with the government’s approval, it has reduced its estimate of future productivity growth from 1.5 per cent a year to 1.2 per cent. Over time, such a shift has a big impact on cumulative economic growth.
Treasury justified its previous assumption on the grounds that productivity growth had averaged 1.5 per cent growth a year over the previous thirty years. But most of the rapid growth was in the 1990s, when we had that decade of “jobless growth.” Since 2005, the Bureau of Statistics estimates, productivity growth has averaged just 1 per cent. Even 1.2 per cent would be doing well.
The bottom line is that, on current settings, the budget would stay in deficit by roughly 2 per cent of GDP, $50 billion a year in today’s money. Without changes, within a decade the government would run up another $500 billion in debt — similar to what the Coalition ran up in its nine years in power.
Something’s gotta give. The International Monetary Fund estimates that Australia’s budget has been in structural deficit since before the global financial crisis. The Coalition promised to fix it, but once in office just made it worse. From 2019 to 2021, on average, the IMF estimated Australia’s structural deficit as 6 per cent of GDP, the third highest among the forty countries it groups as “advanced economies.”
What should Labor do? As I reported a fortnight ago, the consensus among many economists is that the answer, inescapably, is higher taxes. Australia is trying to provide First World services with a revenue base far lower than the First World average, and it’s not working. As both sides have shown us, it’s not politically feasible to make spending cuts on the scale needed, and in today’s world we can’t grow our way out of deficits like this.
Chalmers has been subtly making similar points; as Michelle Grattan points out, he clearly sees this as the start of a long campaign. In his budget papers and media shows, he cites Treasury’s estimates of the expected annual growth in spending over the next decade in key areas: interest bills (forecast to rise by 14.4 per cent a year) and the cost of the NDIS (up 13.8 per cent a year) lead the way, but other heavy items such as hospital costs (annual growth 6.5 per cent) and medical bills (5.4 per cent), aged care, defence and the age pension are all set to grow faster than the economy.
The escalating cost of the NDIS is a deep concern — Treasury says it is now the second most expensive government program behind the age pension, and it’s on track to overtake that by the end of the decade. I doubt that any of us thought that was what we were signing up for. It shows why the government has commissioned NDIS founder Bruce Bonyhady and former departmental head Lisa Paul to chair a year-long review of the scheme. This budget sets up an NDIS taskforce to investigate fraud.
But most of the rising costs stem from the reality that we’re an ageing society, and it’s expensive to look after old people: pensions, medical and hospital costs, aged care services. It was simply phoney for former treasurer Josh Frydenberg to pretend these costs could be paid for while taxes were capped at 23.9 per cent of GDP. They can’t; Treasury estimates that on current settings, spending would climb to 27.9 per cent within a decade. In scrapping the tax cap, Chalmers has taken a sensible first step towards the tax debate we have to have.
Much will depend on whether Albanese and his colleagues — and others with a selfless interest in the issue — support him by joining that debate. It is important that we get the answers right, then implement them, rather than assuming, as the Coalition did, that if we don’t talk about it, reality will just disappear. It won’t; one day the markets will see to that, as they have in Britain.
So did Chalmers and his Labor colleagues get the budget wrong? No. Australia will need to take action to close the deficit, but it didn’t have to do it in this budget. By and large, Labor is moving in the right direction, generating a debate we have to have, and pointing out the hazards we face. Australia has time on its side, and the markets are unlikely to lose faith in a government that shows the right intentions.
But Labor could have done better. How on earth could it seriously claim to be cutting out “waste” while in the same breath committing $2.25 billion to Daniel Andrews’s pet lemon, Melbourne’s southeastern “suburban rail loop”? Victoria’s auditor-general has pointed out that on conventional cost–benefit rules it would deliver only 51 cents of benefit for every dollar spent on it.
The project has now finally been submitted to Infrastructure Australia, which might well come up with a similar finding. Why did Albanese and Chalmers commit now without even waiting for their advisers to report? They have made a rod for their own backs, and the Liberals and Nationals will whack them with it all over Australia — especially in regional Australia, where Labor cancelled every Coalition commitment without even trying to sort out the good from the bad.
Time will tell whether Labor has made the right call in ignoring the pressures on Australia’s kitchen tables. There are lots of ways to cushion lower and middle-income households’ loss of buying power, and Labor should get these solutions ready. Restoring the tax offset is obviously one. Bringing forward the proposed cut in the 32.5 per cent tax rate to 30 per cent would be another (while redrafting the stage three tax cuts to retain a 37 per cent marginal tax rate on income in upper middle levels).
The one surprise packet in the budget, the commitment to build a million new homes in five years from 2024 to 2029, could be upgraded. It’s not as significant as it sounds. A smaller Australia built more than a million homes in the five years to 2019 — and the Reserve Bank and others keep telling us that was not enough.
If the industry, the states and the federal government agree, they should aim higher (a million homes in four years?), target more precisely (at least 50,000 new social/affordable homes a year, and preferably more), and focus on areas of clear housing shortage, particularly in regional Australia. To me, pledging to repeat what we did before Covid is not a big advance.
Chalmers’s roll-up-your-sleeves rhetoric in his budget speech would lend itself well to taking on a new reform agenda: tax reform, and any unfinished business that would make the economy more productive and use our human and natural resources better. One example — his budget contained a little token pressie for pensioners: if you work a little part-time, for this year only, you can earn an extra $4000 without it affecting your pension. Wow.
If that’s worth doing, imagine what the gains might be if Labor picked up Joe Hockey’s lost crusade to gradually dial up the retirement age to seventy? When longevity is improving at a rate of knots, it is not unfair to ask its beneficiaries to spend some of their expanded lifetime in the workforce, rather than taking the lot as retirement.
And why not pick up the sound proposal from the aged care royal commission to lift the Medicare levy by half a cent in the dollar to pay for the cost of improving aged care? I’m pretty sure Australians would accept a tax rise like that if they can see where the money is going.
There are many fertile, exciting ideas Labor can explore. This budget has been a good start. As Chalmers immodestly put it yesterday, the adults are back in charge. Australia is better off for it. •
