Federal Budget Update
By Nico Louw
A few weeks ago, we put forward four tests we thought the Budget needed to pass:
Impose a cap on tax as a share of the economy
Have a credible plan to reverse Australia’s productivity freefall
Rein in inflationary spending
Ease the cost-of-living crisis without making it worse in the long term
Unfortunately, the Budget has failed to meet these tests.
Rather than a plan to set Australia up to meet the challenges ahead, the Budget was a plan to get Anthony Albanese through the election.
It was a Budget the Government didn’t want to have and never planned to have.
The only surprise was a faux tax cut, worth around $5 a week, beginning in 2026-27. One must wonder if these were planned before the Government was forced into this Budget and needed something new to offer up. It seems unlikely.
In our first Watercooler newsletter this year, we said that the Government would want to skip this Budget to avoid revealing the true state of the numbers, including that there will be deficits for at least the next decade.
They’ve done their best to spin them, spruiking lower debt and deficits compared to forecasts at the election in May 2022. But improvements compared to outdated forecasts aren’t real improvements at all.
The real test is how this Budget compares to Labor’s earlier Budgets. And that comparison shows that the Budget is in worse shape than last year’s Budget, and the previous year’s.
It’s the impact of decisions in those previous Budgets that we are paying for today. Jim Chalmers proudly exclaimed last night that Labor had ‘banked’ around 70 per cent of the almost $400 billion in surprise revenue uplifts he has been gifted by better economic forecasts. Not only does this gloss over the fact it was closer to 80 per cent at the last Budget, it also means the Government has spent 30 per cent of this extraordinary surge in revenue!
Just like his former boss Wayne Swan, Chalmers has used temporary increases in revenue, resulting from spikes in international commodity prices that were out of his control, to justify permanent increases in spending, worsening the structural Budget position.
This Budget includes $36bn in decisions that worsen the Budget and only $2.5bn in savings. It's the sixth straight update where Labor has announced more spending measures than savings.
Despite all this new spending, the Government inexplicably chose not to extend the highly successful instant asset write-off for small business. This means the asset limit will fall from $20,000 to $1,000 in July, removing an incentive for businesses to invest and improve productivity.
There was almost $21 billion in net new spending in this Budget (excluding revenue measures such as tax cuts). This takes the total amount of net discretionary spending since the election to $144 billion.
Chart: The impact of Labor’s spending decisions (excluding revenue measures) at each Budget update
Source: Parliamentary Budget Office
As a result of Labor’s spending, the 2023-24 surplus of $15.8 billion becomes a $27.6 billion deficit this year, growing to a $42.1 billion deficit in 2025-26. A $57.9 billion turnaround in two years. Despite $400 billion in additional revenue since the last election, the deficit next year is actually the same as was forecast at the time of the last election.
And this deterioration hides over $100 billion in hidden off-budget spending in areas such as the NBN and cutting student loan debts. That all adds to the debt, which will hit $1 trillion for the first time next financial year.
The increasing debt means interest payments are now the fastest growing component of the Budget. By the end of the forward estimates in 2028-29, debt payments will be the 5th largest expenditure item, up from 9th today. We will be spending more servicing our debt than we do on Medicare or state hospital funding.
The Budget shows that payments as a share of the economy have increased from 24.4% of GDP in 2022-23 and will reach 27% next year, the highest share in 40 years outside of Covid.
This has happened because spending growth continues to exceed economic growth and inflation. The Budget forecasts that spending growth will be 6 per cent above inflation this year, even though it is well-understood that higher spending growth makes it harder for the RBA to cut interest rates.
The Government then assumes that real spending growth will miraculously drop to 3 per cent next year and 0.5 per cent the year after. To say these forecasts are heroic is an understatement, given Labor’s record and the possibility of a Labor-Greens-Teal minority Government.
The public service is set to grow by another 3,400 staff next financial year, taking the increase under Labor to 41,400. The total public service headcount next year will reach a record 213,349, with a wages bill that is almost 30 per cent higher than the last election.
The Government's forecasts for future public service wages are about as realistic as their other spending forecasts. Despite agreeing to give public servants an 11.2 per cent pay rise in the next three years, the Budget continues to assume that the growth in wages comes to a sudden stop in July and then stays flat into the future.
At some point, all this spending needs to be paid for. This means tax increases, spending cuts, or growing the economy faster than spending so that spending falls as a share of the economy.
This is why imposing a cap on taxes is so important. A tax cap would impose much needed discipline on future Governments by ensuring they cannot rely on bracket creep or other tax increases to pay for ever increasing spending.
Without a tax cap and spending restraint, Australia will be left in a weaker position when responding to the future economic and geopolitical challenges we will no doubt face. Building a stronger position will be a multi-year effort and it cannot start soon enough.