Chalmers grapples with a budget where economics and politics pull in different directions

Last weekend’s report that more than 10 million Australians are facing a large tax rise wasn’t a new revelation.

That’s not to denigrate the story, by economic writer Shane Wright in the Nine media. It was an old tale that, in the run up to the May budget, was appropriately new again.

What made it special, however, was that it turned into an exploding cigar. The opposition weaponised it, which was shameless given it reflected a decision taken by the Morrison government. Treasurer Jim Chalmers tried to manage it by labelling it “bizarre”.

The tax hike comes from the abolition of the Low and Middle Income Tax Offset (LMITO), which last year gave those eligible tax relief of up to $1500.

The LMITO was paid as a rebate, so people received a nice boost last year, when they did their tax return. That will be missing this year. The revenue saving by its demise is some $11 billion a year.

The Albanese government had no intention of giving the LMITO (a temporary measure anyway) a further lease of life. It just would have preferred that a pesky journalist hadn’t highlighted the fact, especially when there are constant calls for the government to “do something” about the cost of living, and Chalmers is seeking to carefully curate the narrative for the budget.

Chalmers – together with Reserve Bank Governor Philip Lowe and Treasury secretary Steven Kennedy – this week has been in Washington for briefings on economic and monetary policy.

The economic backdrop for the May 9 budget is grim, although when it comes to the budget itself, things are probably not as dire as Chalmers sometimes paints them.

The International Monetary Fund report, released this week, outlined an uncertain international outlook and forecast Australia’s growth at only 1.6% this year and 1.7% in 2024.

Australia’s inflation was set to fall back more quickly than forecast by the Reserve Bank, shrinking to 4% by the end of the year and 3% by the end of 2024.

Chalmers said in February inflation was the “defining feature” of the Australian economy this year, with the government planning to address it by “responsible cost-of-living relief, dealing with supply chain issues, and keeping spending under control”.

Read more: Grattan on Friday: We need more tax revenue, but don't ask the major parties how we'll get it^[1]

The treasurer wants to seize for Labor the “responsible economic manager” mantle the Liberals always try to wear at election time.

So in the budget decisions, some of which are still being taken, he is the man frowning at spending demands, encouraging savings, and wanting to bank as much as possible of any windfalls.

Budget watchers will have an eye on any big interventions Anthony Albanese, with a concern about the politics, might make. Last year, Albanese shut down the flirtation with remodelling the stage 3 tax cuts due to start in mid 2024 (these are not on the table this time).

The budget has long-term structural problems because of the projected growth in big spending areas, such as the National Disability Insurance Scheme and defence (with a revised capability program about to be announced).

And debt has to be tackled although Chalmers’ constant use of the “trillion dollars” of debt he inherited from the Liberals should be put in context. Chalmers is talking about forecast 2023-24 gross debt – current net debt is something over $500 billion.

In the medium to longer term, the need for budget repair is a serious problem. But for this budget, Chalmers will have the advantage of windful rewards from higher than expected commodity prices (as he did in his first budget, in October).

Independent economist Chris Richardson observes: “There is still a budget problem, but the gods are conspiring to give him a vast amount of wriggle room”.

So why not be generous with cost of living relief? Because that might fuel inflation (depending how it was delivered), and put fresh pressure on interest rates. As Richardson says, this is where the politics and the economics of the cost of living issue clash.

There will be some relief, of course. The government late last year announced modest help with energy bills and details will be in the budget, after the negotiations with the states.

There will also be assistance for those on welfare payments. As part of a deal with Senate crossbencher David Pocock last year over legislation, Albanese agreed to set up the Economic Inclusion Advisory Committee. It is led by former Labor minister Jenny Macklin.

Read more: Former treasury head Ken Henry says we need 'big bang' tax reform rather than incremental change^[2]

Its brief is “to provide advice on economic inclusion including policy settings, systems and structures, and the adequacy, effectiveness and sustainability of income support payments ahead of every federal budget”.

The committee’s clout is strengthened by the fact its wish list has to be made public a couple of weeks before the budget.

The government may respond to the committee’s recommendations when they’re released. It doesn’t have to accept what the committee wants, but it won’t be able to avoid doing something substantial.

Whether there are any “surprise” cost of living initiatives in the budget remains to be seen.

One item that will not be there is the government’s “Measuring What Matters Statement”. This goes beyond traditional economic measures to look at a broad range of social and environmental indicators of wellbeing.

The October budget had a very limited first cut of a wellbeing statement. Among other measures, it found Australia at or better than the OECD average (and stable or improving) on household income, the employment rate and housing affordability, and worse than the average (and declining) on household debt, labour underutilisation, and the gender gap in feeling safe.

Read more: Grattan on Friday: Trimming the tail of the superannuation tax tiger is no easy task^[3]

The coming, much more elaborate, statement is to be released around mid-year. Treasury has received more than 160 submissions. The most common areas raised include children, inequality and poverty, health, mental health, First Nations peoples, environment and climate change. Also raised have been housing affordability, intergenerational wellbeing, and digital inclusion.

The government says so far five broad themes have emerged for considering wellbeing: prosperity, inclusion, sustainability, cohesion and health. It stresses they are not necessarily the final themes – there’s another round of consultations to be held.

Chalmers says: “It’s clear there’s a real appetite to look at new ways that we can measure progress in our economy and measure the wellbeing of our communities and our society”.

Chalmers didn’t say so, but these wellbeing statements will also open new channels for demands on future budgets.

References

1. ^{^} Grattan on Friday: We need more tax revenue, but don't ask the major parties how we'll get it (theconversation.com)
2. ^{^} Former treasury head Ken Henry says we need 'big bang' tax reform rather than incremental change (theconversation.com)
3. ^{^} Grattan on Friday: Trimming the tail of the superannuation tax tiger is no easy task (theconversation.com)