The Times Australia
Business and Money

The budget is full of good news, but good news isn’t the same as good management

  • Written by Kate Griffiths, Deputy Program Director, Budgets and Government, Grattan Institute

This year’s budget has “something for everyone”, with very little in the way of cuts and no new taxes.

It’s a classic “good news” pre-election budget.

Whether it is too good to be true hinges on whether this budget represents not just good news but also good economic and fiscal management.

Throwing the dice on inflation

At the centre of the budget is a big gamble on inflation.

A surge of new spending when inflation is still above the Reserve Bank’s target range is a risky move.

Several of the government’s measures, among them energy rebates and extra Commonwealth rent assistance, will directly, mechanically, lower the Consumer Price Index, resulting in lower-than-expected inflation.

The gamble is how much more Australians will spend on other things as a result, and whether a cooling economy offsets that extra spending.

It is a big gamble, because a lot of extra consumer spending would delay interest rate cuts or even force another interest rate rise this year. Either of those outcomes could damage the government’s re-election prospects, so it’s a political as well as an economic bet.

Banking windfalls, until now

Every budget is a product of its time. Some treasurers are lucky enough to preside over stronger-than-expected economic growth, high prices for minerals, and the revenue windfalls that result. Other treasurers have been dealt a global pandemic or global financial crisis.

Good management is about what you do with the cards you are dealt.

Treasurer Jim Chalmers has had good luck so far. His three budgets to date have delivered him net windfalls totalling $257 billion.

Until now, he has taken the fiscally responsible path of “banking” most of these windfalls – 76% across the three budgets – although more in his earlier budgets than this in one.

Little to fix the structural deficit

Banking windfalls is just one indicator of good management. This budget’s medium-term forecasts paint a bleak picture of ongoing structural deficits. Last year’s Intergenerational Report[1] showed that in the absence of major policy changes, they will only grow.

So, what has this budget done to tackle the growing structural deficit? Very little.

The budget contains hardly any revenue-raising measures and no sign of tax reform[2]. There is also little in the way of explicit spending cuts, although there is a promise to further rein in the growing cost of the National Disability Insurance Scheme (NDIS).

No single budget was ever going to fix the structural deficit. But this one raises big questions about how this government plans to tackle the structural problems.

Even to meet the current forecasts, formidable spending restraint will be required. Spending growth would need to be well below that of previous governments.

Spending pressures are only likely to grow

The spending forecasts only reflect the decisions the government has already taken – not those it is likely to want or need to make in the next few years, including in the lead-up to the next election.

There is growing pressure for further spending on several fronts, including the truly inadequate[3] level of Australia’s unemployment payment and the ballooning cost of payments to the states to prop up the West Australian GST deal[4] (now estimated to cost $52.9 billion over 11 years, with pressure to extend it).

And it is still to be seen whether this government can actually rein in growth in the cost of the NDIS. Its projected costs have blown out a further $15.6 billion since the December budget update.

The government insists it will be able to largely offset this with savings of $14.1 billion through legislative changes it calls Getting the NDIS Back on Track[5].

But we will need more than just spending restraint to fix the structural budget problem. It is incumbent on both the government and opposition to put forward some ideas, dare I say tax reforms, to consider at the next election.

When the luck dries up, good management will depend on them.

References

  1. ^ Intergenerational Report (treasury.gov.au)
  2. ^ tax reform (theconversation.com)
  3. ^ truly inadequate (grattan.edu.au)
  4. ^ West Australian GST deal (theconversation.com)
  5. ^ Getting the NDIS Back on Track (ministers.dss.gov.au)

Authors: Kate Griffiths, Deputy Program Director, Budgets and Government, Grattan Institute

Read more https://theconversation.com/the-budget-is-full-of-good-news-but-good-news-isnt-the-same-as-good-management-230110

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