Australia

Mon Mar 24

This week’s federal budget will focus on cost-of-living measures – and a more uncertain global economy

Written by: John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra

Treasurer Jim Chalmers will bring down the federal budget on Tuesday.

It’s likely most of the major spending initiatives have already been announced. An extra A$8.5 billion in spending on Medicare ^[1] will aim to ensure nine out of ten GP visits will be bulk billed by 2030. Queensland’s Bruce Highway is to be upgraded with the Albanese Government providing $7.2 billion ^[2]of the $9 billion cost.

In a speech last week, Chalmers promised ^[3] “meaningful and substantial” cost-of-living relief.

He also stressed the global economy is more volatile and unpredictable. He said the budget bottom line would be little changed from the mid-year update released in December, when the deficit was forecast to be $26.9 billion this financial year ^[4].

It was a comprehensive dress rehearsal for tomorrow evening’s budget speech.

No rabbits out of the hat

Australian budgets today are well signposted in advance in speeches such as this. That is deliberate. It is seen as a mark of responsible fiscal management to have few surprises, either positive or negative.

In past decades, treasurers were prone to announcing surprise spending measures. No longer. The rationale for rejecting the “rabbit out of a hat” approach was spelled out by former treasurer Wayne Swan in his 2008 budget lockup press conference ^[5]: he said the budget had to be “responsible”. Chalmers was Swan’s deputy chief of staff at the time.

This means calls ^[6] by economists such as Chris Richardson ^[7] and Ken Henry ^[8] for major tax reform are unlikely to be heeded.

Former Treasury Secretary Ken Henry says current tax settings are not sustainable and are unfair to younger generations. Lukas Coch/AAP

Bracket creep (increases in tax revenues as taxpayers move into higher tax brackets) will do most of the work in the very gradual windback of the budget deficit. In the mid-year budget update, it was projected to take a decade to return the budget to balance.

Good luck rather than good management

Not that a balanced or surplus budget is a sign of good budgeting. The driver of recent budget surpluses under both Labor and Coalition governments has not been government policy but stronger than expected commodity prices ^[10] and exports. They have been accidental, not deliberate.

While deficits add to debt, imposing costs on future generations, what matters is whether the debts can be paid. If the economy grows faster than the rate of debt, the situation is manageable. So we are likely to see a chart in Tuesday’s budget papers showing this, with debt gradually declining as a share of Gross Domestic Product over time.

However, these forecasts for the bottom line do not include off-budget items ^[11] such as special green energy funds or student debt write-offs that total close to $100 billion, according to Deloitte Access Economics.

This is because the budget covers only the “general government sector” – public service departments and agencies and the defence force. It is not the whole of the public sector, which includes commercial or financial entities like government business enterprises, the Reserve Bank of Australia, and various funds.

On Sunday, the government announced ^[12] further cost-of-living relief with an extension of electricity rebates, giving households another $150 this year. This will avoid headline inflation rebounding above 3%, as the Reserve Bank is currently forecasting ^[13].

The energy rebate last year cost the budget an estimated $3.5 billion in 2024-25 ^[14]. Extending it for six months will cost $1.8 billion ^[15]. Chalmers has also promised another reduction ^[16] in the maximum cost of prescription medicines to $25.

Another round of electricity bill relief has been promised. Lukas Coch/AAP

In December’s budget update, the unemployment rate was forecast to be around 4½% in mid-2025 and stay around that level for the next couple of years. Given the unemployment rate was steady at 4.1% in February ^[17], that forecast may be lowered.

Inflation was forecast to stay below 3%.

The increasing risk of a global trade war will see some reduction in forecasts for global and Australian economic growth. The OECD has lowered its forecasts ^[18] for global growth and emphasised the international outlook is highly uncertain.

This means the Australian budget forecasts are more likely than usual to be wrong. We just don’t know in which direction they will be wrong – will they be too optimistic or pessimistic?

What will it mean for interest rates?

The Reserve Bank board is unlikely to feel it has enough additional information to cut interest rates again at the April 1 meeting.

Nonetheless, the government will be constrained in how much support it can provide households. It does not want undermine its narrative of future interest rate cuts by stimulating household spending too much.

Something to watch for will be “decisions taken but not yet announced”. These are additional initiatives the government will announce during the election campaign. They will be able to answer the “where’s the money coming from?” question by saying they are already included in the budget.

Finally, will there be increases in defence spending? US President Donald Trump is pressing US allies to do this. Trouble is, defence spending does not address the political problem of cost-of-living pressures – if anything it adds to them.

A potential way out is for government to support more defence spending, but only “in principle”, leaving the details for future budgets. That would help manage both domestic and international pressures.