Why Albanese needs to avoid a budget
By Nico Louw
First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.
We begin the new year with speculation on when the Federal election, due by 17 May, will be.
Will the Prime Minister pull the trigger on an early election, likely for mid-April, or will he hold out for a few extra weeks so the Government can first deliver a Budget on 25 March?
As much as we suspect the PM would like a few more guaranteed weeks in the Lodge, the bad news Australians would receive in another Budget is a compelling reason for him to call an earlier election.
Many of you would be familiar with Donald Horne’s quip that Australia is a lucky country, run mainly by second rate people who share its luck. Well, there is no one who has shared Australia’s budgetary luck more than Jim Chalmers. And that luck has run out.
A simple look at the history of the iron ore price shows just how lucky Chalmers has been, while serving as Treasurer and previously as Chief of Staff to Wayne Swan. The impact of higher iron ore prices was perfectly timed to enable the big spending Budgets of Chalmers and his former boss (and make the Coalition’s task of returning the Budget to balance much harder). Treasury estimates that a $10USD increase in the iron ore price will increase tax receipts by $3.3 billion over four years.
Both Swan and Chalmers irresponsibly used temporary increases in revenue resulting from spikes in international commodity prices that were out of their control to justify permanent increases in spending, worsening the structural Budget position. The mining boom allowed Wayne Swan to paper over his spending with unrealistically high iron ore price forecasts and announce four imaginary surpluses. His protege was even luckier, enjoying similar price increases with much higher iron ore export volumes.
Following the disaster of Wayne Swan’s “four years of surpluses I announce tonight”, Treasury now takes a conservative view when forecasting iron ore and other commodity prices, leaving the Treasurer to claim credit for Budget improvements and justify more spending if prices are higher than forecast (in Chalmers’ first Budget in October 2022, Treasury forecast the iron ore price would fall to $55USD/tonne).
Ironically, given the Government’s distaste for all things coal, Chalmers also benefited from an extraordinary increase in both thermal and metallurgical coal prices as a result of post-Covid stimulus and Russia’s full-scale invasion of Ukraine.
High inflation has hurt families, but also gave Chalmers a further dose of Budgetary luck, effectively taking more from Australian workers to give to the tax office. It’s no wonder that economist Chris Richardson has called the Albanese Government “the luckiest Government Australia has ever seen - at least in Budgetary terms”. Richardson estimates that, since the election, Treasury has raised the estimated tax intake by an extraordinary $355 billion.
The Government has committed tens of billions of dollars in ongoing spending using a river of gold that has stopped flowing. The Chinese steel production that devoured our iron ore has plateaued, and the construction boom that drove it appears to have well and truly ended.
A new Budget means a new set of forecasts that would reveal all this in flashing lights. Iron ore prices and inflation are a bandaid that has been covering up the Government’s fiscal mismanagement, and a Budget means they’d have to rip it off and reveal their surpluses were a temporary fluke.
The Government’s behaviour since the new year reveals they know their luck has run out. Although the PM has been on a pre-election spending splurge, many of his announcements have clearly been designed with hiding the Budget impact as a primary objective.
One trick Governments use to hide new spending is to take it “off-Budget” by labelling it as an investment, which under Budget rules means it won’t have a significant cash impact as an expense. Take for example, recent announcements to inject equity into the NBN and top-up the capital of the Clean Energy Finance Corporation. It seems likely that this Budget trick was a key driver behind the sudden need to spend $3 billion to “finish” an NBN we thought was already finished, and $2 billion to top-up what was already the largest ‘green bank’ in the world, which now has a total investment capacity of $32.5 billion. These “investments” come on top of $50 billion in other hidden off-Budget spending since the last election.
A Budget could draw attention to any number of other Budget tricks. How much of the $7.2 billion in “new” funding for the Bruce Highway is really new, and how much is actually committed in the next four years? Is the growth in NDIS spending on track for the 8 per cent growth promised, or has it blown out again? How can the Government explain the revelation that it hasn’t budgeted for any increase in public sector wages over the next three years, despite having already agreed to annual pay rises?
Answering these questions and revealing the true state of the Budget is something any PM wouldn’t relish, let alone want as the starting point for an election campaign. So as much as he might want to spend a few weeks longer in the Lodge, expect the PM to go to the polls just early enough to stop Jim Chalmers delivering his fourth Budget and giving Australians bad news that could leave the Government worse off politically.