By MILLIE MUROI, Economics Writer
If there’s only one thing you gleaned from the budget – and it is the new tax cuts – that’s exactly what the government wanted.
The clock is ticking for Prime Minister Anthony Albanese, who, at the time of writing, was expected to call an election as early as Friday. That means a sweetener – such as a promise to let you keep more of your pay – is perfectly timed to nudge voters its way.
But the move also doubled as a distraction from something Labor would rather not talk about: the fact the nation’s finances will be in the red for the next decade despite a turnaround in the economy’s health.
This isn’t the end of the world, but with most of its major policies already announced in preparation for the election, the government knew it needed to give the press something good to latch onto when it unveiled its budget on Tuesday.
The tiny tax cut – the equivalent of about $5 a week for most taxpayers – due to kick in next year, was a sure-fire way to make a good impression.
But the budget revealed a bit more than just a cute tax cut. It also painted a picture of the state of the economy and the government’s game plan.
“Fiscal policy” is the government’s way of steering the economy by changing how much it spends and collects in tax. When the government increases its tax collections by more than it increases its spending from year to year, it’s choosing a “contractionary” stance (one that slows down the economy by taking more money out of it than the government pumps in).
When the government increases its spending by more than it increases its tax collection, it is adopting an “expansionary” stance (stimulating the economy by pumping more money into it). That’s the position taken by the government this year.
Turning to a page in the budget papers many economists call the “table of truth” shows us how the budget position for this financial year (and expectations for future years) has changed from previous forecasts – and what the biggest drivers are.
The “parameter variations” in this table tell us how cyclical factors – things the government has little control over – affect the budget. For example, lower global interest rates over the next few years are expected to shrink the interest rate bill paid by the government despite its growing debt.
AMP chief economist Shane Oliver says higher commodity prices and employment were the kind of parameter variations that helped deliver the government two back-to-back surpluses in 2022-23 and 2023-24.
Then there’s the effect of government policy decisions that weighed down the budget this financial year (2024-25) by $137 million more than was expected back in December, mostly because of an increase in spending on things such as cheaper medicines. This affects what’s called the “structural” part of the budget.
Next financial year, 2025-26, the government’s decisions will drain roughly $7 billion more than previously expected. That’s because it has made new promises such as earmarking $8 billion to boost the amount of bulk-billing and a six-month extension of electricity bill relief at a cost of $1.8 billion.
But improved economic conditions next year should help top up the budget by $12 billion. That’s mostly because of what’s called “automatic stabilisers”, which affect how much money comes into – and leaves – the government’s coffers, adjusting automatically to changes in the speed of the economy.
When business is booming and incomes are rising, for example, people pay more in tax, meaning more cash gets swept into the government’s hands. When the economy gets sluggish and people lose their jobs, the amount of tax flowing in falls.
As Betashares chief economist David Bassanese notes, the government is assuming (among other things) that there will be more people in jobs over the next few years, meaning there should be more income tax flowing in.
The government is also expecting economic growth to pick up and inflation to stay around the 2 per cent to 3 per cent target range, while slightly tweaking down its unemployment forecast to 4.25 per cent over the next four years.
Most of the savings, though, will be spent by the government, leaving the budget only a few billion dollars better off than expected back in December over the next four years – and still in deficit.
At the time of the mid-year budget update, the coming financial year was expected to have a $47 billion deficit – which is 1.6 per cent of GDP. Now, because of measures in the budget and changes in the government’s forecasts, it’s going to be $42 billion, or 1.5 per cent of GDP. The deficit is still a lot bigger than it was last financial year.
Now, it’s worth noting the Coalition, in 2022, also had deficits (that is, spending exceeding revenue) laid out for 10 years. As independent economist Saul Eslake points out, neither side of politics really wants to have the tough conversation of how to fix this problem when there’s growing demands for spending in areas such as healthcare and defence – and especially not before an election.
But the government isn’t the only major player when it comes to managing the economy. The Reserve Bank is also a heavyweight. It doesn’t have the same spending or tax powers, but it uses a tool called “monetary policy” – which you might know better as interest rates.
Like the government’s fiscal policy, monetary policy can be expansionary when interest rates are dropped (because it encourages spending and investment), or contractionary when interest rates are increased.
For the past few years, the bank has been cranking up interest rates in an effort to rein in inflation. For the first time since mid-2022, the bank in February notched down interest rates from 4.35 per cent to 4.1 per cent, moving towards an expansionary stance. Why?
Because it reckons, like the government, that prices are now rising slowly enough, and demand has softened enough relative to supply, to indicate the economy is no longer running too far ahead of its capacity.
The budget is unlikely to have much sway on the Reserve Bank’s forecasts or coming rate decisions. The spending changes were modest, the deficits have been flagged for months and the government’s forecasts aren’t drastically different to what the bank is expecting.
But if the outlook for the economy over the next few years is as rosy as the government is expecting, there’s a case for whoever is in charge in future years to ramp up efforts to return the budget to a surplus, or at least a neutral position, earlier.
That doesn’t have to mean drastic cuts to spending. It could mean changing the way the government collects revenue by introducing an inheritance tax or reducing the capital gains tax discount, and pursuing bolder productivity-boosting measures (Labor’s ban on non-compete agreements is a good start).
In the meantime, the budget for this financial year is expected to be nearly $28 billion in deficit. In the coming year, that deficit is expected to increase to $42 billion. This is an increase equivalent to 0.5 per cent of GDP, making the stance of fiscal policy adopted in the budget mildly expansionary.
