This year, the Budget is officially back in black. On Tuesday, Treasurer Jim Chalmers announced an expected budget surplus, the first in 15 years. The budget included measures to address the cost of living, provide more support to vulnerable Australians, and healthcare reforms.
But is the 2023 federal Budget bold enough?
Listen to Iris Chan, Fellow, discuss the federal Budget with Grattan’s CEO, Danielle Wood.
Read the Back in Black report
Iris Chan: This year, the budget is officially back in black. On Tuesday, Treasurer Jim Chalmers told us to expect a budget surplus, which would be the first one in 15 years. The budget included measures to address the cost of living, provide more support to vulnerable Australians, And some healthcare reforms. I’m Iris Chan, a fellow at Grattan’s Budgets and Government program.
In this special podcast, I’m joined by Grattan’s CEO, Danielle Wood, to talk about this federal budget. Dani, you were at the budget lock up on Tuesday night, so what was it like in the room?
Danielle Wood: The lock up’s really interesting. so it starts about five hours before the budgets. handed down, you get giant stack of budget papers, thousands of pages in total.
and the vibe is a little bit high school exam. So you sort of really going through, as quickly as you can try to find the highlights. Try and find what the government might not want to tell you. your phone is confiscated, you’re cut off from the internet. So it’s not, very often in life that you have five hours totally off the grid.
And then there’s various opportunities to talk to treasury officials, to try and work out what’s going on in the numbers, the treasurer and the finance minister. wander around as well as doing a press conference. So look, it’s, it’s quite fun for budget nerds like me, but it is, it’s a very intense block of time.
Iris Chan: There’s been a fair bit of attention on the surplus this year, and many will be surprised to see the government in surplus. Just two years after recession. So how did we get here? Good question. At first,
Danielle Wood: I’m going to say it is a forecast surplus. It is not a surplus until we reach the end of financial year.
And of course that was the mistake we all made with the back in the black coffee mugs, when, when the forecast surplus at that point didn’t eventuate, but if we do get there, you’re right. It’s a pretty. Extraordinary result, thinking that we only had a recession two years ago. How did we get here? well, it’s a combination of a lot of good luck and a bit of good management.
So the lot of good luck, almost 150 billion in what we call parameter variations, which is economic surprises that benefited the budget bottom line. That is largely increased tax collection, big increase. Income taxes above what we thought we were going to receive just back in October. That’s because we’ve had a much stronger jobs market.
Unemployment is down. Underemployment is down. People are working more hours. Participation rate is up. That’s all driving more money into Treasury’s coffers. And on top of that, big increase as well in company tax collections, commodity prices. Have stayed pretty high up, certainly well above the treasury assumptions, which are very conservative.
So all of that’s fed through to a much healthier bottom line. So that’s the good luck part. the good management part is interesting, and this is obviously the story that the government is very keen to sell. They said they’d be very restrained with this good luck. They banked. more than 80 percent of those windfall gains from the economic circumstances, many economists will say, well, maybe that should be a hundred, you know, these are temporary windfalls.
We don’t want to lock in permanent spending against them. We’re in an, inflationary environment, but you know, the government is right to say that by the standards of history, they have been restrained. And Iris, as you know, cause you did this fantastic piece of work. You know, we went back and looked at this question of, you know, where treasurers have had good luck over the past 20 or so years.
how much have they banked to the bottom line? And 80 percent plus is a pretty good result. we only found one year where a treasurer did better, which was Wayne Swan back in 2010, where 93 percent of the windfall gains. That year was banked, and some years, if we go back to some of the pastillo mining boom years, at some years, less than 10 percent of the gains were banked.
So a lot going out the door and in policy decisions. So by those standards, you could say that they’ve managed this, very lucrative period well.
Iris Chan: At the same time, there was a lot of pressure on the government to do more to support the vulnerable in a lead up to the budget. Can you tell us a little bit about what they did and whether they should have done more given this big surplus?
Danielle Wood: You know, it’s a difficult line for the government to walk in, in this budget. There was a real coalescence of demands, to help those that are most vulnerable. so those that are on particularly government welfare supports. There’s obviously in a, situation where you’ve got broad cost of living pressures, people also looking for household relief.
but at the same time, the government doesn’t want to risk adding to inflation. So what they did, the centerpiece of the budget was a cost of living package that had a number of components. One was around energy bill relief via. electricity providers, state and federal governments will contribute to reducing bills for consumers and businesses over the next year.
That will benefit about five and a half million households and about one million businesses. it’s done in such a way as to at least reduce. Headline pressure on inflation. The other components of the package were largely about targeting really vulnerable people in the community. So we saw an increase in JobSeeker, only the second material increase in 20 years, 40 a fortnight.
There was an increase in rent assistance of 15%, and there were some changes, particularly for single parents. They will now be able to stay on the single parenting payment until their youngest child is 14 rather than 8. So all of those, I think, are very welcome. We have been among the many voices pointing out that, you know, those payments are just not sufficient for people to have a basic minimum standard of living.
Government will still, I think, need to go further to get, towards anything that looks like a kind of reasonable benchmark. And we are just talking a basic standard of living here. but certainly it was a step in the right direction.
Iris Chan: Now you’ve touched on this briefly, but there’s been a lot of debate amongst economists about whether this budget will be inflationary.
What do you think the overall impact will be?
Danielle Wood: Yeah, it’s been an interesting debate. And I think half the time people are arguing about direction rather than quantum and then the quantum matters here. So the direction point comes about because. as I said before, some of the measures in the budget, particularly that energy bill package, will reduce headline CPI.
It flows through to a lower index, you know, that can be a good thing in a period because we’ve got very high inflation at the moment. Bringing that number down could be a good thing for stopping expectations becoming anchored at a higher level. So that’s useful in itself, but we do need to recognize the government is spending money and putting more money in the hands of consumers will add to demand pressure and ultimately inflation.
But the right question is how much when we look at the net effects of policy decisions in this budget, they’re putting in about an extra 20 billion over the next 4 years. it is loaded a little bit towards the front year. but when you think of that in the context of the broader economy, it’s pretty small.
And we’ve now had some macro economists come out, run it through their macro models and said that, you know, the impact on, the CPI index is probably about 0. 1. Yes, it is inflationary. But that’s pretty modest, as you know, Iris, and I, you know, don’t think it’s going to be keeping Philip Lowe up at night.
Iris Chan: Now, you’ve been arguing for bolder measures in this budget, and the budget does touch on a few things that Grattan Institute has argued for in the past, like an increase to JobSeeker and Rent Assistance, scaling back on tax concessions for SUPA. And more places for older Australians wanting home care.
Do you think this budget is bold enough? And what do you think it gets right?
Danielle Wood: Look, I think it could go bolder. And as I said, you know, at the heart is the challenge of government that wants to do some things versus the inflationary risks and versus the fiscal pressures the budget faces. So you could do those things in a bolder way if you are willing to do more on spending and taxes elsewhere.
That, for example, might’ve allowed the government to go further on job seeker payments. We have, you know, put out a lot of suggestions in the lead up to the budget, as you know, Iris, in our back and black. report and we’ve done a whole podcast on that, but, you know, we put out a whole lot of pretty, big options, on the table as part of that things like better infrastructure procurement and, you know, really delighted actually the government has now a review into the infrastructure pipeline.
I think that is a real opportunity to, try and pay back on some of those, less economically viable projects. Having a look at the WAGST deal. Costs even more than we thought. Now we can see in the budget papers, looking at things like putting the family home above a high threshold, 750, 000 into the age pension asset test.
Revisiting the stage three tax cuts. I’ll go there very briefly, but you know, we’re not saying they should be abolished. entirely, but we think that they can be reconfigured, in such a way as to reduce their impact on the budget and to make the whole package more fair. and looking at other tax concessions as well.
So you mentioned super tax concessions there. That was pretty modest, in a scale, just looking at a higher tax rate on earnings for people with a super balance of more than 3 million in retirement. there are a number of other changes to super tax concessions that would make sense and keep them more targeted to their policy purpose.
But also things like the capital gains tax discount, family trusts, you know, all these leakages to our income tax base. I think should be on the table. So no, the budget didn’t go the whole way in terms of some of those bold reforms, but I think there were some good steps. One thing I did want to recognize as, as, as bold, which hasn’t received much attention as some of the health reforms, not so much the bulk billing incentives, although they were probably needed.
I’m talking about the changes to primary health care and how they’re delivered. So some really important steps towards what could be a very, you know, almost a generational shake up of the way we deliver general practice services. So moving towards team based models of care, so not just GPs working alone, but working with nurses, working with allied health professionals in a way that, you know, will probably be more efficient, but also better for patients, starting to shift funding models for GPs so they’re not just paid.
On a transactional basis, you come in, but for people with chronic disease, you know, they’ve given a bundle of money and then they’re assessed on the outcomes that they achieve for those patients. You know, these are big, significant reforms to primary health. this is just stage one, but it’s, I think it’s really good to see the government putting money into this and articulating that broader strategy.
So, there is, there is a little bit of boldness amongst it all.
Iris Chan: Now, one of the things that we at Grattan have been worried about. Is the government not raising enough revenue for services that Australians expect from their government? But now we have an unexpected surplus and government debt is expected to get back to pre COVID levels in a decade’s time.
So do we still have a problem at all?
Danielle Wood: It’s a very good question. And certainly when you look at the numbers in the budget, including the 10 year projections, things look a lot rosier than, you know, even than what we saw in October. So as you say, now, we have a short term surplus, one year only according to the forecast.
But we see, you know, pretty modest structural deficits out over the decade. and net debt, you know, coming down as a share of GDP, through the kind of late 2020s. That is a very different picture to what was painted before, which was kind of these big persistent structural deficits. So if you just looked at the numbers in the budget and took them on face value, I think you’d be a lot more sanguine about the budget position, but I think there are reasons that we should be skeptical about those numbers.
So some of the improvement in the budget position over time is driven by reductions in interest payments. because the short term budget position is better, we’re going to need to borrow less and therefore interest costs are down. So that, that is a, a, a genuine improvement. But a couple of the other things that I would point to is the NDIS.
We were told in October from the, gubernatory that that would be growing. About 13. 8 percent a year on average each and every year over the decade. The budget writes that number well down. It’s now expected only to grow about 10 percent a year over the decade. And that seems to be purely based on an assumption that we’re going to be able to reduce the growth rate.
There was no policies in the budget that would tell me how that would be achieved. So we sort of banked these improvements in the bottom line without the policy work to get there. The other thing is that the spending estimates that those numbers are based off. are just inherently optimistic. So it assumes that outside of fast growing programs, so things that are growing fast like defense and age pension, NDIS, and some of the MBS costs, that all other government spending, including spending on hospitals, will shrink as a share of GDP over the decade.
That looks pretty heroic to me, you know, no more spending, incredible cost constraint. so I’m very skeptical about the 10 year numbers. And so, you know, I don’t think the structural budget problem is over. I think it still exists. I think we might be in slight denial about it. But I think there will be, you know, more hard decisions to come in future.
Iris Chan: So Dani, just one last thing, I think it would be fair to say that Grattan has had a significant impact on policies funded in the federal budget, but we’re not a consultancy. we’re an independent not for profit and provide all our research to the public for free.
Danielle Wood: That’s right. We are about policy change in the public interest.
And you know, it’s, it’s really. It’s really rewarding when you see that some of that detailed work that we do gets picked up, you know, whether that is, you know, the policies around job seeker and rent assistance, whether it is about those really significant reforms to the way we deliver GP services, and we do rely on individual donations to make that work possible.
So if you like the work we do, if you care about good public policy, do please consider supporting Grattan. you can do so on our website at grattan.edu.au/donate.
Iris Chan: Well, thank you very much, Dani. Those are very insightful comments and I can’t wait till the next budget.
Danielle Wood: Happy budget week.