Monday 31st of March 2025

what we can afford without adding to inflationary pressures....

Labor’s pre-election budget provides well-targeted cost of living relief within the bounds of responsibility, but the restoration of living standards is some way off.

As widely anticipated Labor’s budget contained no surprises, except for the small income tax cuts. Apart from these, all the other major new policy proposals had been announced prior to the budget over the last couple of months.

 

A cautious responsible budget    By Michael Keating

 

Policy decisions since the mid-year economic and financial outlook last December have added another $7674 million in new spending in the next financial year (2025-26), and well over half of this amount had already been announced prior to Tuesday’s budget.

Further, we cannot expect much more in the way of new policy announcements during the election campaign. This budget only makes provision for $323.4 million to cover the cost next year of “Decisions taken but not yet announced”, which implies that not much is yet to come in the way of new policies.

Clearly the cost of living is the major issue going into the coming May election, and the new policy measures are largely well-targeted to provide cost of living relief. In particular, the extra assistance for childcare, energy bill subsidies, the reduction in student debt, incentives to increase bulk billing by doctors, reducing the cap on the cost of pharmaceutical benefits, and 50 new Medicare urgent care clinics will all help reduce the cost of living.

Understandably, there are critics who would like to have seen greater support for some of the most disadvantaged groups, such as the unemployed. But the amount of government support was necessarily limited by what the government could afford without adding to inflationary pressures.

An increase in inflation would have helped no-one. But as the treasurer said in his budget speech: “Treasury now expects inflation to be sustainably back in the [2%-3%] target band six months earlier than anticipated.” “The worst is now behind us and the economy is heading in the right direction.”

According to the Treasury forecasts, “Excluding the impact of fuel and energy rebates, inflation is expected to sustainably be in the RBA’s target band around the middle of 2025, earlier than the end of the year expected at the MYEFO.”

As the government keeps repeating, its fiscal policy has successfully worked alongside monetary policy to bring down inflation without entering a recession – a most unusual achievement. Unemployment is forecast to rise gradually to a peak of 4¼% which is still near historic lows. The workforce participation rate is elevated, and since mid-2022 employment has grown by more than one million people, with 80% in private sector jobs.

Further, we can now be reasonably confident that the Reserve Bank will cut interest rates further in the coming months. This will result in the most substantial cost of living relief for the one-third of households with mortgages. For example, if interest rates fall by half a percent, a household with a $600,000 mortgage would save $200 per month, and it is these mortgagees who have experienced, by far, the greatest cost of living pressures in the past few years.

So what are the criticisms of the budget? Some commentators, and especially the Opposition, are critical of the continuing projected budget deficits, and call for greater discipline in government spending.

The other criticism is that living standards remain depressed. Real wages have fallen by 7.3% from their peak in the year ending in June 2021, and while they are now increasing again, that rate of increase is so small that in two years’ time, at the end of June 2027, real wages are forecast to be still 6% below their previous peak. Arguably this government has not been ambitious enough in promoting budget and economic reforms.

These criticisms will be discussed separately in what follows.

What are the risks with continuing budget deficits?

While a continuing run of budget deficits as projected does involve some risks, especially given global economic uncertainties, these deficits are not necessarily a disaster.

The size of the budget balance should be judged by whether or not it is appropriate to the current economic conditions. The reality is that in the last 50 years the Australian Government budget has only been in surplus 14 times, or less than a third of the time. Further, these surpluses were often driven by stronger commodity prices and exports and were not necessarily deliberate.

In addition, the problems that allegedly arise from government debt are often exaggerated. What matters is whether the debts can be paid, and that is not really an issue for Australia.

Comparisons among different countries are difficult because of different government arrangements, with some having more levels of government than others. But if we compare the debt of all levels of government combined, we find that general government gross financial liabilities in Australia in 2024 were only 57.9% of GDP. This is much lower than in the US (122.0%), the UK (103.0%), Canada (105.1%), and the Euro area (90.1%).

Similarly, government outlays for all levels of government combined are lower than elsewhere, with total Australian Government outlays representing only 38.9% of GDP in 2024, compared with 46.3% in the UK, 44.4% in Canada and 49.4% in the Euro area. Even the US was higher with government outlays at 40.1% of GDP.

The government for its part insists that the underlying cash balance of the budget has improved by a cumulative $207 billion over the seven years to 2028-29, compared to the forecasts when it took office. Since then, the government has delivered $94.1 billion in savings and reprioritisations, and over the seven years to 2028-29, real payments growth is estimated to average only 1.7%, around half the 30-year average.

In short, the government can reasonably contend that its responsible approach to budgeting has resulted in a stronger budget position than it inherited from the previous Coalition Government. However, given the chronic underfunding of government programs by that Coalition Government, it is arguable that the present Labor Government should have been prepared to spend more.

That leads to the second, alternative criticism of this budget.

Living standards and economic reforms

Fundamentally, any significant and lasting improvement in living standards depends on faster productivity growth.

Over the last 10 to 15 years, productivity growth has been slow, and not surprisingly there ae always calls for reforms to improve productivity. The government has commissioned the Productivity Commission to advise on how to lift future productivity growth, but personally, I am not holding my breath. While I have no doubt there will be some useful recommendations, I doubt that they will make much difference.

Fundamentally, productivity growth is driven by technological change. And as the rate of productivity growth has fallen by much the same amount in all the advanced economies over the last decade or more, that suggests that the rate of technological progress has slowed.

That, in turn, means it will not be easy to restore the desired rate of increase in productivity. A clear course of action would be to encourage research and development, but Australia has cut its support for this and in addition it has never restored the cuts in the real funding of universities during the last Coalition Government.

But the funding of research and development is only one pressing example of where Labor’s budgets, including this latest, have lacked ambition. Too many services are arguably under-funded, and this will remain until Australia undertakes real tax reform.

A fairer and more equitable Australia, which experiences higher economic growth, is only possible if the government has more revenue to distribute. This need not come at a cost to economic growth. All other advanced economies have to raise more revenue than Australia does to pay for their higher government spending on services, and there is no evidence that this has impacted their economic growth relative to Australia.

In sum, so long as the government ignores the possibilities for serious tax reform, we cannot expect what we really need from the government budget.

https://johnmenadue.com/a-cautious-responsible-budget/

 

YOURDEMOCRACY.NET RECORDS HISTORY AS IT SHOULD BE — NOT AS THE WESTERN MEDIA WRONGLY REPORTS IT.

 

         Gus Leonisky

         POLITICAL CARTOONIST SINCE 1951.

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YOURDEMOCRACY.NET RECORDS HISTORY AS IT SHOULD BE — NOT AS THE WESTERN MEDIA WRONGLY REPORTS IT.

 

         Gus Leonisky

         POLITICAL CARTOONIST SINCE 1951.