John Hewson
Chalmers’ budget balancing act

The midyear check-in on the budget is due in the next week and it’s more than usually fraught. The cost of living is still running too high and the opposition is weaponising every issue it can. As Treasurer Jim Chalmers prepares to deliver the Mid-Year Economic and Fiscal Outlook (MYEFO) statement, he faces a very big question. How he will balance the desire to maintain the long-awaited surplus Labor touted this year as evidence of its sound economic management with the need to help households still struggling with inflation and the highest interest rates in 12 years.

Labor’s budget management is high on the agenda of the Coalition and its media mates, who always have their eyes on the next federal election. The situation is rife for a populist onslaught against the Albanese government. The overarching strategy of the opposition under Peter Dutton is informed by its obsession with bringing down the government – obstructing its efforts and casting doubt on its competence at every turn. This has become an ugly and unedifying spectacle, ignoring available evidence and policy substance at the expense of our national interest. By comparison, Prime Minister Anthony Albanese has been attempting to focus more on governing for the medium term, to move beyond these short-term political games.

The populist position is the government should just spend the surplus, even though its fiscal credibility has been built on both spending restraint and a willingness to bank rather than spend the windfall revenue gains from some key global commodity prices. The government must remain alert, as it has so far, to the risk of further stoking inflation with any support it offers, and ensure further coordination of its fiscal policy with monetary policy, in line with recommendations from both the Reserve Bank of Australia and the International Monetary Fund.

The politics is starting to cut in here, with the opposition claiming “broken promises” about the cost of living, cheaper power costs and so on, as part of its general attack. It continues to allege Albanese has been “distracted” from the necessary focus on the cost-of-living issue by his overseas travel and an expensive, failed referendum. It ignores the considerable direct cost-of-living assistance, as part of a $23 billion package, the government has been able to provide with minimal inflationary impact. Polls have begun to emerge asking whether people feel “better off” or “more confident about the future” than they did at the last election. 

At the risk of stating the obvious, the MYEFO statement will be delivered to voters with varying lived experiences of the economy. Households, businesses and state governments will have varying expectations of what the government’s emphasis should be. 

The official purpose of the statement is to update the economic and budgetary outlook, providing estimates of any government decisions made since the previous budget that affect expenses, revenues and capital estimates, as well as any changes to economic parameters. So how Chalmers pitches the narrative will be important. His task is not helped by the several different versions of how well our economy is doing. 

The recent IMF assessment, for example, was congratulatory about our economic resilience and the success of the RBA’s interest rate strategy. And the RBA governor, Michele Bullock, surprised many with her recent assessment, offered during a panel appearance in Hong Kong, that households are in a “good position” because their “large savings buffers” are “largely still intact”. This didn’t tally with the mounting evidence of mortgage and rental stress, and some job insecurity. Nor did it sit well alongside sales data for October suggesting consumers spent more to buy less, and the allegations of price gouging by large businesses, which has now become the subject of a Senate inquiry, expected early in the new year, into the behaviour of Coles and Woolworths supermarkets.

While the headline economic numbers on growth and jobs are relatively attractive in a global context, it’s important to recognise Australia has been in a per capita recession for several quarters, as a reflection of increased immigration. 

So there are several key fiscal issues to be tackled, though they may not all be addressed in the MYEFO. One that has got a lot of press since last Friday’s meeting between Chalmers and state and territory treasurers in Brisbane is the distribution of GST among the states. Several counterparts pressed for the “no-worse-off guarantee” – put in place by the Coalition in 2018 but never legislated – to be made permanent. This arrangement required the federal government to compensate any shortfalls in the GST proceeds to the states and territories, by giving each back at least 70 per cent of revenue collected in their jurisdictions. 

This problem is a classic example of policy drift – dating back to the Howard era. It was seen as politically clever of the Howard government to secure the support of the states and territories for the new GST package by committing all the revenue to them. What it actually secured was an annual shit fight about its distribution, with Western Australia wanting a guaranteed floor to its share of the distribution, requiring a separate budget allocation as a top-up.

    The issue came to a head with the debate in the lead-up to this week’s national cabinet over healthcare and NDIS funding. The government’s solution for now is to extend the guarantee by three years to 2030-31, at a cost of about $10.5 billion. 

More broadly, it is surprising the issue of Commonwealth versus state and territory financial relationships hasn’t ever been formally addressed. What is needed is a once-and-for-all agreement on the allocation of responsibilities for policy development, spending and service delivery – to just one level of government – to eliminate duplication and the blame game, and to define the financing terms to fund such a structure. For example, where there are clear national responsibilities – such as, say, the environment, industrial relations and transport – these should accrue to the Commonwealth government, rather than each state having corresponding departments that are sometimes at odds with one other. From the point of view of service delivery, it has long been generally accepted that institutions such as schools and hospitals are better addressed at state level within nationally accepted standards – though there really should be nothing sacred about this approach.

Against this structure – to return to a critical theme – the tax system should be overhauled. This reform needs to take into account all levels of taxation, with all existing taxes in the pot. It will make little sense to keep some of them, especially those that impact on the competitiveness of the states, such as variations in payroll tax, road tax charges and stamp duties.

But perhaps the most pressing tax issue on which the electorate is looking for an early decision is the very expensive and inequitable stage three tax cuts. The government has remained committed to delivering these despite the projected cost of more than $300 billion, and the outsized benefits to those earning more than $180,000 a year. It is very difficult to see how the cuts can be delivered as they currently stand without serious inflationary consequences. 

As for the outlook on spending, it may surprise many that there isn’t an annual review process for all expenditure projects to assess their effectiveness in achieving the initial objectives and of their costs to do so. It is not unreasonable to expect that our governments should move to such an approach. Labor has foreshadowed this in the past, but it remains to be implemented as an annual feature of the budgeting process.

The government has already done something similar with its methodical review of all announced infrastructure projects – including many under the previous Morrison government that were just blatant pork-barrelling, without departmental support and with little or no cost-benefit assessment. While it is reasonable that many of these projects are delayed, if not abandoned altogether, some states have wanted them to proceed but are without the financial capacity to take them over, and are pushing for a national government contribution. 

Overall, the message from the MYEFO should be a relatively positive assessment of our economic outlook, despite the uncertainty that always attends such things. Australia remains one of the few countries to sustain a top-shelf AAA credit rating from the three major ratings agencies, and the economy has been much more resilient than expected. That’s probably a result of the hundreds of billions of dollars injected to cushion the worst impact of the pandemic and associated response – including the lockdowns that threatened to push unemployment well into the double digits and pitch the economy into recession. Growth obviously has slowed as the interest-rate increases have flowed through – with more effects likely still to come – and inflation has subsided, though it is still not expected to be back to the desired target range until late 2025. 

Though Chalmers has been seen as a reformer, I suspect Albanese and his strategists will lack enthusiasm for him to open another front that the opposition could exploit.

This article was first published in the print edition of The Saturday Paper on December 9, 2023 as "Budget balancing act".

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