Sun Oct 23

Australia's growth downgraded and inflation drives massive rise in cost of pensions and payments in budget

Written by: Michelle Grattan, Professorial Fellow, University of Canberra

Tuesday’s budget will point to a slowing Australian economy, with growth forecasts cut, and contain more than $21 billion of savings and decisions to redirect spending.

Delivered against a background of rising inflation, increasing interest rates and huge global uncertainties, Treasurer Jim Chalmers’ first budget will also contain $32.8 billion in extra funding over four years for pensions and payments compared to the April Pre-election Economic and Fiscal Outlook (PEFO) forecasts.

The budget pays for the largest indexation increase to payments in more than 30 years for allowances and the largest in 12 years for pensions.

High inflation and changing economic parameters account for this huge rise social security payments.

Spending on social security payments in 2022-23 is set to be $120.1 billion. This is an increase of $3.1 billion since PEFO.

The breakdown of social security payments in 2022-23, with increases compared to PEFO forecasts, is:

Job Seeker payments: $14.3 billion for 2022-23 – an increase of $1.5 billion and $10.6 billion over four years
Support for seniors/age pension: $55.3 billion for 2022-23, an increase of $1.1 billion in 2022-23 and $11.8 billion four years
Family assistance payments: $20.5 billion for 2022-23, an increase of $4.4 billion over four years
Financial Support for Carers: $10.6 billion for 2022-23, an increase of $0.8 billion in 2022-23 and $2.5 billion four years
Financial Support for people with Disability: $19.5 billion for 2022-23, an increase of $0.4 billion in 2022-23 and $3.5 billion four years.

The budget will show the forecast for Australia’s real GDP growth has been downgraded to 3.25% for 2022-23, which is a quarter of a percentage point lower than the forecast in PEFO.

Growth for 2023-24 is forecast to be a low 1.5%, one percentage point lower than PEFO.

The slowdown is expected to be primarily driven by weaker household consumption growth, as a result of increasing interest rates and cost of living pressures.

Chalmers doesn’t expect the Australian economy to go into recession, despite the slides in key economies overseas.

Labor campaigned strongly in the election on lifting real wages, but circumstances have pushed that prospect into the distance.

Chalmers told the ABC: “Real wages were falling behind before the election and they’ve been falling since the election. That’s because inflation is higher for longer as a consequence of the war in Ukraine, natural disasters and issues in our own supply chains here at home, and also a consequence of a decade of wage stagnation”.

He said on “current treasury forecasts, inflation will persist for longer than we’d like, and wages growth, which is beginning to happen in our economy, will cross over with inflation some time we think the year after next”.

Chalmers said the budget would be “family-friendly”, recognising “that our pressures on the economy come from around the world, but they’re felt around the kitchen table”.

It would be responsible, sensible and suited to the times “because when you’ve got all of this uncertainty around the world, the best possible response is a responsible budget at home”.

On the savings side, $6.5 billion has been found from what the government describes as “re-profiling of infrastructure projects to better align the investment with construction market conditions”.

Some $3.6 billion is saved from reducing spending on external labour, advertising, travel and legal expenses.

More than $2 billion has been cut from a range of grants programs.

Savings have been identified across government agencies. But the government says this is just the “first phase” of its spending audit, with more savings to be found in future budgets.

With regional programs set to be hit, shadow treasurer Angus Taylor told the ABC said he’d just spent eight days cycling through regional NSW and “a lot of those regional infrastructure investments are paying back in spades right now. We’re seeing incredible resilience and robustness.”

Apart from the budget, the resumption of parliament this week will see the introduction of the government’s industrial relations legislation for multi-employer bargaining, which is running into business opposition.

In a statement on Friday the Australian Chamber of Commerce and Industry, the Business Council of Australia and the Australian Industry Group said the planned changes “raise the risk of higher unemployment, increased strike action and damage to our economic security”.

The groups said the government should “slow down and consult more widely and more meaningfully”.