As the May budget draws closer its outlines are becoming clearer. It looks like it will embrace the incremental “don’t scare the horses” approach that has so far defined Labor’s first year in office. Revenue gains will be largely banked, but otherwise efforts at budget consolidation will be modest. Tax increases are off the table for all but the most well-off. There will be some additional supports for the most vulnerable but not big-ticket items such as increasing JobSeeker.
This budget after a year in office would typically be the one for the government to make the big or tough decisions. So if “steady as she goes” is the theme for this budget, it will almost certainly be the overarching theme for the government’s first term. Is this the right approach? And what would a bolder government agenda look like?
Let’s start with the backdrop. All budgets are delivered in a context of broader economic or social challenges that both shape the choices, and restrict the options, of the government of the day.
In 2023 there are three big challenges.
The first is higher-than-comfortable inflation and the associated cost-of-living squeeze for households. Real household incomes have gone backwards. Normalisation of supply chains as well as the Reserve Bank’s stiff medicine – 10 interest rate rises and counting – is starting to bring inflation down, though it remains well above target, at 7 per cent. Households feeling the squeeze will invariably look to government for support – but an increase in government spending would risk keeping inflation higher for longer.
The second challenge is the coalescence of demands for more support for the most vulnerable. Advice published in the past fortnight from the government’s economic inclusion advisory committee and the Women’s Economic Equality Taskforce (of which I’m a member) made a powerful case for higher spending on those facing severe hardship.
After 20 years of slipping further behind community living standards, Australia’s unemployment benefits are among the lowest – and by some measures the lowest – in the OECD. People on these payments face high levels of financial stress. They make choices as to whether they pay for their medicine, energy bills or food. They struggle to find affordable rental properties. This python squeeze has been two decades in the making.
The economic inclusion advisory committee recommended sizeable increases to JobSeeker and related payments. The Women’s Economic Equality Taskforce called for the single parenting payment to be extended to parents with children over the age of eight – currently many parents are pushed on to the lower JobSeeker payment when their youngest child reaches that age. Both committees called for an increase to rent assistance, given the distance it has slipped behind private rents.
Of course, these measures come with a sizeable price tag. This pushes up against the third defining challenge: the size of the structural budget problem.
The medium-term fiscal outlook is far from healthy. Spending on the NDIS, defence, hospitals, medical benefits and aged care are all expected to grow strongly during the next decade. Government spending is projected to average more than 27 per cent of GDP over this period, compared with less than 25 per cent across the three decades prior to the pandemic. Adding in recent decisions, such as the AUKUS submarines deal and higher pay for aged-care workers, pushes it a quarter of a percentage point higher again.
Revenues have not kept up. Future structural budget deficits are projected to be about 2 per cent of GDP, or about $50 billion a year, in today’s dollars. The Grattan Institute estimates the true number could be closer to $70 billion. Debt is expected to continue to climb even as the economy stabilises.
So how is the government proposing to navigate these challenges? The answer seems to be at a gentle canter rather than a gallop.
The government will exercise fiscal prudence and inflation protection by banking most of the short-term windfall gains that will be delivered by high commodity prices and a stronger-than-forecast labour market. The government will adopt some of the lower-cost proposals from its expert advisory groups to ease pressure on the vulnerable. Expanding the parenting payment and boosting rent assistance are the most likely candidates.
And while the price tag for each of these measures runs to hundreds of millions a year – hardly small change – the government has steered clear of the most expensive proposal. The $132 weekly increase in JobSeeker recommend by the economic inclusion advisory committee would have cost the budget almost $6 billion this year. The government has ruled out any such increase.
The government will take some tentative steps on budget repair – largely by pursuing modest measures that don’t offend many. In terms of spending, that means cracking down on rorts and waste, including in the NDIS. In terms of tax, it means increases that only hit a small group of individuals and businesses that are unlikely to generate much political sympathy.
Already announced is the higher tax on superannuation earnings for the 0.5 per cent of Australians with balances higher than $3 million in retirement – which is expected to raise about $2 billion a year. Also on the cards are tweaks to the petroleum resource rent tax to make sure gas producers, who are currently enjoying windfall profits, make a higher contribution for their use of Australian resources. Most other changes to tax have been ruled out.
Overall the picture is a budget of incremental change. It will make some things a bit better and not too much worse. But ultimately it will only play footsies with the big social and fiscal challenges.
A bolder approach would be more in keeping with the scale of these challenges and the point in the political cycle.
The government could commit to more of the recommendations of its advisory groups. These include changes that would support workforce participation in a period where a tight labour market is biting – including abolishing the activity test for accessing childcare, and supporting the higher pay for childcare workers that is desperately needed to attract and retain our skilled early years workforce.
As the Women’s Economic Equality Taskforce advice explains, over time, measures that give women an opportunity to participate in the paid workforce, and children the chance to get high-quality early learning and care, pay dividends many times over.
The government could support an increase in JobSeeker and related payments that would be life-changing for the close to one million Australians who live on them. Even if it doesn’t go the full $132 a week recommended by the economic inclusion committee, any sizeable increase would be at least a step towards reducing poverty and supporting work readiness for this group.
The government could neutralise the inflationary and fiscal impacts of these proposals by making bolder decisions on increasing taxes and reducing spending elsewhere.
Grattan Institute’s pre-budget report “Back in black? A menu of measures to repair the budget” proposes a menu of options for tax increases and spending reductions that could make a meaningful dent in the budget deficit.
Redesigning the stage three tax cuts – by retaining the 37 per cent tax bracket – would reduce the size of tax cuts for high-income earners and save about $8 billion a year. Reducing tax breaks and minimisation opportunities would also be a good fiscal and economic move. Winding back superannuation tax concessions, reducing the capital gains tax discount, limiting negative gearing and setting a minimum tax on trust distributions would collectively raise more than $20 billion a year.
Reducing fuel tax credits to better reflect the environmental damage caused by heavy vehicles would add another $4 billion a year.
For spending, the best discipline would be to adopt better processes for infrastructure and defence procurement. Making better decisions upfront, based on economic, rather than political, considerations, would be worth several billion dollars a year.
Grattan’s report puts forward another $15 billion a year of savings measures, including undoing the Western Australian GST deal, counting the family home in the age pension asset test above a threshold, and improving hospital efficiency and purchasing in health.
Over time, changes will also be needed to sustain the fast-growing NDIS.
A budget that brought in some combination of these measures would be a bold play for a fairer, more gender-equal and more fiscally sustainable Australia. So what is the government waiting for?
Being cautious, competent and neatly sidestepping unpopular policies brought the Labor Party under Anthony Albanese to power. But a year into its tenure, a safe distance from the next election and enjoying a sizeable popularity lead over the Peter Dutton-led opposition is surely the time to spend the capital.
Many in Labor are talking about taking bolder policies to the next election as part of a “two-term strategy”. But if the prime minister isn’t willing to have these conversations now, what’s the chance he will want to have them in the pressure cooker of an election campaign?
This article was first published in the print edition of The Saturday Paper on April 29, 2023 as "Albanese’s three biggest budget challenges".
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