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Opinion article

Budget reckoning is inevitable after the election

In an election year, it was always going to be hard for Treasurer Josh Frydenberg to resist focusing on Australia’s short-term problems ahead of the long-term challenges. Though this budget delivers immediate modest cost of living relief to many households, it fails to convincingly address how Australia will tackle its stubborn and growing fiscal gap, and languishing productivity performance.

Figures from Treasury reveal Australia does not have an immediate budget emergency. Instead, there is a growing structural disconnect between the demands on government and the revenue needed to deliver on them. That disconnect will now have to be addressed while sustainably managing Australia’s much larger debt servicing burden, and amidst the challenges of global instability, ageing and more frequent and severe natural disasters. The budget outlines over $200 billion of cumulative deficits across the forward estimates, and stubborn budget deficits over the next decade.

This confluence of demands and challenges can be dealt with in three ways: sustained strong productivity driven growth, strengthening our revenue base and/or reducing the growth of government spending.

This budget puts its bets on Australia growing out of its difficulties based on strong business investment and the strongest wages growth in a decade, while acknowledging the latter is highly uncertain.

Relying on short-lived economic booms to deliver continuing fiscal dividends is a dangerous path, yet it is one pursued strongly in this year’s budget. In 2022-23, the fiscal dividend of a commodity price boom and better than expected pandemic recovery since MYEFO has largely been spent in 2022-23. Almost half of the $38 billion improvement has gone to new measures, including almost $9 billion in temporary cost of living payments that risk adding more fuel to inflationary pressures.

More fundamentally, the budget makes very few serious decisions to boost the productive capacity of the economy setting the foundation for future growth. Investing in productivity is the best way to insulate the economy from future global shocks and grow wages. I would have liked to see in this budget more to further accelerate the return of migration, further incentives for business investment and specific measures to better coordinate and deliver the strained infrastructure pipeline more effectively. There is more funding for skills but absent a new National Skills Agreement, it is unclear whether this will make any progress on fixing an outdated training system that does not support the needs of a modern workforce.

The gradual improvement in the bottom line over the medium-term is highly dependent on payments remaining stable as a proportion of the economy while receipts continue to grow.

This assumption neglects the long-term risks pressures on both sides of the budget. An ageing population will narrow the personal income tax base. Australia’s corporate tax revenues rest on the fate of a relatively small number of large companies – the top 10 corporate taxpayers account for around 30 per cent of all revenues and those companies are disproportionately represented by just two sectors – resources and banking.

Reducing the pace of spending growth is the most difficult and politically dangerous task, seen all too painfully in the 2014 Budget response to the Commission of Audit. It is perhaps unsurprising then that the budget papers are littered with references to “household savings” while budget savings measures remain scant.

But governments cannot vacate the field on the spending side of the budget. Making sustainable savings requires a deft touch and patience. The sheer size of the health budget (over $100 billion in 2022-23) and the over $200 billion spent each year on social security and welfare suggest that small efficiencies can drive substantial savings. The complex architecture of these systems can easily see a savings measure in one area materialise as a new cost in another. For example, reduced funding for general practitioners can result in increased demand in hospital emergency departments.

The best way for a government to confront our budget reckoning is to be prepared. CEDA proposes this is done first by getting a full assessment of the budget challenges before the nation in a whole of federation intergenerational report undertaken by the Parliamentary Budget Office. Then it’s about locking in new disciplines by overhauling the Charter of Budget Honesty Act and locking in a schedule of evaluations of the budget’s biggest programs. Time has not yet run out to get ready for our budget reckoning, but the clock is ticking.

This article originally appeared in the Weekend Australian on the 2nd April, 2022.

About the authors

Jarrod Ball

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Jarrod Ball joined CEDA as Chief Economist in 2017 with over 15 years of experience as an economist across the public and private sectors. He has held senior roles at the Business Council of Australia, in EY’s advisory services practice and more recently at BHP. Jarrod also worked in the Federal Government and was a lead adviser on microeconomic reform for the Victorian Departments of Premier and Cabinet and Treasury and Finance. He is a member of CEDA’s Council on Economic Policy and the Melbourne Economic Forum. Jarrod holds a Masters degree in Economics from Monash University and undergraduate degrees in Business (Economics) and Arts from the University of Southern Queensland.

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