What to expect from the federal budget | 7.30

Key Concepts

Budget deficit, budget surplus, fiscal policy, government spending, taxation, productivity, commodity prices, global financial crisis (GFC), COVID-19 pandemic, inflation, interest rates, Reserve Bank of Australia (RBA), structural budget problems, revenue, expenses, National Disability Insurance Scheme (NDIS), cost of living, terms of trade, construction industry productivity.

Historical Context: Deficits and Surpluses

The discussion begins by referencing past budget outcomes, highlighting the shift from deficits to surpluses and back again. Specific examples include:

• 1987-88 Budget: Mentioned an imbalance with a deficit cut to $27 million.
• Years Prior: A $10.3 billion labor deficit was turned around.
• Later Period: Australia achieved a $7.1 billion surplus.
• 2020 Budget: Forecast a deficit of $230 billion due to the COVID-19 pandemic. This was later revised down to $137 billion in the first Charmers budget.
• 2022 Budget: Initially forecast a $50 billion deficit, but ultimately resulted in a $14 billion surplus.

The volatility of budget forecasts is emphasized, attributing it to factors like commodity prices and Australia's status as a small, open economy.

Government Spending and Revenue

The analysis delves into the composition of government spending and revenue, noting key trends:

• Spending as a Proportion of the Economy: Increased from a low of 24.4% to a forecast peak of 27.2% in 2025-26, the highest level since the early 1980s.
• Tax as a Proportion of the Economy: Forecast to be 23.4% in the current financial year, in line with but lower than the later years of the Howard government.
• Spending Cuts: Treasurer Jim Charmers and Finance Minister Katie Gallagher claimed $22 billion in savings through spending restraint.
• Windfall Revenue: The government banked around four-fifths of unexpected revenue gains from higher commodity prices.

Economist Saul Eslake identifies three main drivers of higher government spending: increased spending on health, aged care, and disability; increased defense spending; and higher interest payments on national debt accumulated since the GFC and COVID-19 pandemic.

Structural Budget Problems and Future Challenges

The discussion highlights the underlying structural issues affecting the Australian budget:

• Lack of Structural Balance: The current government has not fully addressed the structural budget problems needed to achieve a balanced budget or surplus in the medium term.
• Underinvestment in Social Policy: Past underinvestment in areas like social policy requires increased spending now, creating a challenge for budget sustainability.
• Future Spending Pressures: Significant future spending pressures are anticipated, particularly in defense, potentially requiring increased taxation. An increase of 1% of GDP in defense spending would equate to an additional $30 billion.

The Need for a National Conversation on Taxation

The segment emphasizes the need for a broader public discussion about taxation:

• Changing Measures of Budget Management: The traditional focus on spending cuts is no longer sufficient for good budget management.
• "Adult Conversation": A mature debate is needed between the government, opposition, and electorate about the fairest and least economically damaging ways to raise revenue for necessary spending.
• Current Tax System: Australia is currently a "tax and spend" economy, relying heavily on household income tax.
• Alternative Approaches: There is a need to consider alternative approaches to raising revenue to avoid continuously escalating the burden of income tax on households.

The Reserve Bank's Perspective

Former Assistant Governor at The Reserve Bank, Lucy Ellis, provides insights into the RBA's perspective on the budget:

• Limited Impact on RBA Outlook: The budget is not expected to significantly alter the RBA's economic outlook.
• Monitoring Key Measures: The RBA will be monitoring the extension of electricity rebates and the nature and timing of government spending.
• Inflation: The RBA will be looking at the extension of the electricity rebates which pushes out the date at which inflation bounces back up again on a CPI basis.

Productivity and Economic Growth

The importance of productivity growth is underscored:

• Living Standards: Long-run growth in living standards depends on productivity growth (value added or GDP divided by total hours worked).
• Beyond Government Reform: Productivity is not solely dependent on government reform but also on innovation, business models, and investment.
• Business Responsibility: Businesses have a significant role in driving productivity improvements.
• Government's Role: Governments can assist by reducing regulatory burdens and streamlining approvals.
• Construction Industry: The construction industry is identified as an area with a significant productivity issue.

Transition from Surpluses to Deficits

Lucy Ellis explains the shift from surpluses to deficits:

• Revenue vs. Expenses: The government budget is determined by the balance between revenue and expenses.
• Conservative Commodity Price Estimates: Treasury typically uses conservative estimates for commodity prices, leading to potential revenue surprises.
• Limited Future Uplift: The potential for future revenue increases from commodity prices is limited due to capped iron ore export volumes and peak steel production in China.
• Spending Increases: Significant spending increases, particularly in the NDIS and cost-of-living measures, have contributed to deficits.

Conclusion

The Australian budget faces complex challenges, including structural imbalances, rising spending pressures, and the need for a national conversation about taxation. While the government has made some progress in managing inflation, addressing the underlying structural issues and ensuring long-term fiscal sustainability will require a broader and more comprehensive approach. Productivity growth is crucial for improving living standards, and both businesses and governments have a role to play in fostering innovation and efficiency.