Chalmers is trying to make economic uncertainty a springboard for reform

When he talks about the May 12 budget, Treasurer Jim Chalmers always stresses that what’s done on things like the capital gains tax discount will be a matter for cabinet.

It would be more accurate to say the fate of controversial proposals will depend on where Anthony Albanese is willing to land.

Budget preparation, on which cabinet’s expenditure review committee is working, has been transformed by the ever worsening Middle East war.

The fuel shortages, particularly of diesel, will drag at the economy. The federal government on Thursday appointed a fuel coordinator, and national cabinet was briefed on the crisis. Chalmers has released modelling showing Australia’s inflation rate could hit 5% this year.

This week’s interest rate rise (driven by factors predating the war) combined with higher petrol prices will worsen the mood of disgruntled voters who were already in a cost-of-living squeeze.

As Chalmers said on Thursday, the Middle East conflict will now be “a defining influence” on the budget, given its effect on global growth and inflation and the flow through to Australia.

The uncertainty is making it much harder than usual to predict the budget’s moving parts. But Chalmers is trying to do a lot more than just produce a budget to manage extremely difficult times. He is attempting to use this budget to make his mark as an agent of change.

It’s the first budget of the term, and Labor has a massive majority; there should be never a better time for the government (read Albanese) to embrace boldness – unless the PM becomes spooked by the war crisis.

In a speech this week setting the scene for the budget, Chalmers talked a big game – and, by doing so, made himself a hostage. If the budget is judged to be a damp squib, the expectations he’s raised will come back to bite him.

Chalmers says the budget will contain three packages: on savings; productivity and investment; and taxation.

“If the main constraint we are collectively facing is capacity, these packages will help expand it,” he said.

“More savings to make even more room for the private sector to grow, while building fiscal buffers.

"Productivity enhancing reforms to boost supply, generate higher living standards and unlock more investment in the process, to help the economy grow without adding to price pressures.

"And tax reform to drive more productive investment, while supporting budget sustainability and equity, and helping to rebalance the system.”

With the debate raging about the role of government spending in fuelling inflation, Chalmers held out the prospect of “substantial” savings in the budget.

As it feared (without cause, it turned out) being pushed into minority at the election, the government threw a lot of money around, which has made containing spending more challenging and painful.

The pursuit of savings is further complicated by the unavoidable need for extra spending on defence.

If Chalmers is serious about budget repair, the government has to avoid giving in to the inevitable pressure for more cost-of-living relief which will only grow as many families’ budgets become further stretched.

On productivity, Chalmers says he is looking to “attracting and absorbing investment, making it easier to build and build faster, and cutting compliance costs where we can”.

Admirable objectives (which Chalmers would say he has been pursuing already) but, on the evidence, slow to advance in practice. Boosting productivity depends on many other players than the federal government, not least employers and unions, and on factors such as how fast and effective the take up of AI will be.

For those judging Chalmers’ “reform” credentials, the sharpest eyes will be on the budget’s tax changes.

Chalmers says his tax reform will be guided by three principles: promoting intergenerational equity, encouraging productive business investment, “if we can afford to”, and making the system “simpler and more sustainable”.

He has all but confirmed the capital gains tax discount will be pared back, which will be sold as a measure to help first home owners into the housing market.

A Senate inquiry, tabled this week, with a Labor/Greens/independent majority, found the discount, combined with negative gearing, “skewed the ownership of housing away from owner-occupiers and towards investors”.

Read more: Capital gains tax discount ‘skewed’ housing towards investors: Senate inquiry^[1]

The budget could take various options in curbing the 50% discount. One would be to refashion it towards new builds. Reining in the discount raises the issue of grandfathering, to soften the changes, which has its own options.

Cutting back the discount would have an indirect effect on negative gearing, which Chalmers has always been interested in tackling. But would Albanese be willing to go that far, for example by capping the number of properties an investor could negatively gear?

That is said to be potentially on the table but technical issues would need to be solved. Some government sources point out it would be harder to sell than the capital gains tax change because, although a relatively small number of people negatively gear (1.1 million taxpayers negatively geared properties on the latest available figures), there is a public perception it is widespread and many people aspire to buy investment properties.

Consideration of the tax arrangements for trusts is also likely part of the budget discussions.

In the 1980s and 1990s, governments cast their tax reforms in terms of very wide sets of measures with trade offs. This government’s current thinking appears inclined to a more targeted approach, with its present consideration focused on the tax treatment of assets.

It can counter criticism this is too limited by noting it has income tax cuts in the pipeline.

In his own economic speech this week, Albanese highlighted another contrast with the 1980s and 1990s.

Pointing to Australia’s vulnerabilities as the last link in the global supply chain, Albanese said it had a been different world when Hawke and Keating’s “great reforms” opened up the Australian economy – a more stable world with trade barriers coming down and strong regional growth.

“We cannot wait around hoping for those days to return”, he said.

In the new world, Australia had to “upgrade to a new economic model”. “We have to build an economy that is more resilient, more self-reliant and geared to our national strengths,” he said. “This is about making more things here.”

As the Middle East crisis buffets Australia, like it is doing to so many countries, Chalmers remains determined to see a bright side (a reminder of the old line about never wasting a good crisis). “All this economic uncertainty and volatility is a reason for more reform, not less. It’s a reason to go further, not slower,” he said.

References

1. ^{^} Capital gains tax discount ‘skewed’ housing towards investors: Senate inquiry (theconversation.com)