On Tuesday, 12th of May, Federal Treasurer Jim Chalmers handed down his fifth budget under the Albanese government. What did Grattan’s experts make of this year’s Budget, and what was left on the cutting room floor?
Transcript
Erin-lea Brown: On Tuesday, 12th of May, Federal Treasurer Jim Chalmers handed down his fifth budget under the Albanese government. Last year, following their election victory, the government set out an ambitious agenda for tax and productivity reform. But as budget night approached, that agenda collided with a very different reality.
Rising fuel prices, renewed inflation pressures, instability in the Middle East, and growing concerns about the sustainability of government spending. The focus of the budget had to shift, becoming as much about a crisis response as it was about long-term reform. In the end, the budget the government handed down had measures to address both these priorities.
So what path does this budget put Australia on going forward? Has the government got the balance right between meeting our short-term challenges and delivering long-term reform? That’s what we’re here today to unpack.
Welcome to The Grattan Podcast. This podcast is being produced on the lands of the Gadigal, Ngunnawal, and Wurundjeri people. Grattan acknowledges and celebrates the First Nations people on whose traditional lands we meet and work, and whose cultures are among the oldest in human history.
I’m Erin Lee Brown, Deputy Program Director of Grattan’s Economic Prosperity Program.
Today I’m joined by Grattan Institute CEO, Dr. Aruna Sathanapally, Sam Bennett, Director of our Disability Program, and Alison Reeve, Director of our Energy and Climate Change Program.
Welcome, Aruna, Sam, and Alison. We’ve got a very big budget, some very big reforms, and probably not enough podcast time, so let’s get into it.
Aruna, let’s start at the top. You’ve had experience putting budgets together at a state level, and you were in the budget lockup on Tuesday afternoon. And for those who don’t know, budget lockup is where media and commentators are given early access to the budget papers five hours before they are released to the rest of the public.
Aruna, what were your first impressions of this budget?
Aruna Sathanapally: Look, even though we had a heads-up, there were a lot of things that got announced before the night. My first impression when I got the budget papers was that it was a huge budget. There’s a lot there. Normally, you have this luxurious six hours. You’ve got nothing to do but to read a stack of budget papers.
This time around, I was not confident I’d be able to really get through the detail in the six hours. It felt like there wasn’t quite enough time to kind of get across the full breadth of what the government was putting forward, and some part of that was just because of the sheer amount of work that went into this budget relative to a typical budget.
This budget was really kicked off by the post-election period, straight into it from June, the big economic reform roundtable process where all the ministers were set to work to gather productivity-enhancing ideas.
And so you could really see in the budget papers that long period of preparation, which culminated in this budget, which has many of the hallmarks of a traditional budget, but also contains a really broad, overarching economic agenda. A lot of those things aren’t typical budget measures. They’re not really about spending.
They’re about regulatory changes or other levers the government has, but it’s all rolled up for us in this budget in terms of giving us a sense of what the government is seeking to achieve in terms of economic reform.
Erin-lea Brown: One of the tensions leading into this budget was whether the government could still pursue long-term reform during an immediate crisis.
Now that you’ve seen it, where do you think that budget landed?
Aruna Sathanapally: Look, this was always the risk, particularly when the war broke out early this year, that we would find ourselves in that trap where a crisis chews up the bandwidth of government ministers, the public, the media, to actually be thinking about our long-term challenges. We certainly saw that happen through COVID.
A lot of the long-term challenges Australia is facing were there for us before COVID, and we spent a few years losing time, and we emerged on the other side of the crisis with deeper, more profound problems with productivity, with aging, with our health system than we had before.
So that was always the risk, that this crisis would provide grounds for, for the government to press pause on the economic reform agenda. But what they’ve said very clearly is that’s not the approach that they took.
So much of what’s in this budget resembles the conversations that were being had in the second half of last year, and I think that’s a credit to the government and to the public service that they’ve been able to maintain that momentum on a set of economic reforms. It’s not everything, but it’s still a substantial package of reforms that we need to crack on with, and we really can’t afford to waste any more time.
Erin-lea Brown: That’s a really nice segue into talking about some of the detail around those reforms. Exactly as you say, we’ve seen the Treasurer Jim Chalmers talking about tax reform and intergenerational fairness prior to the conflict in the Middle East. It was heavily hinted at that this government would take some steps towards tax reform and make changes to capital gains tax, negative gearing, and the treatment of discretionary trusts.
Do you think this budget moves the tax system in a more sustainable and equitable direction?
Aruna Sathanapally: At the roundtable last year, one of the days was set aside for this particular issue, and in addressing the roundtable, I said that there were four really big opportunities for making our tax system better, more efficient, fairer, and more sustainable given what we know about the trends we’re facing.
And the first of those was our personal income tax system. That’s the one that this budget has actually made some meaningful strides in. The point about Australia’s personal income tax system is not that it raises too much money in aggregate.
Actually, what we see in the comparative data is that’s not necessarily the case, but it is imbalanced in the way that it collects personal income tax. The system has leaned heavily on wage and salary income, so labour income, what you earn from having a job, while providing some really generous concessions to other forms of income.
Now, there’s some good justifications for having a different treatment of labour income and the income that you get from savings. The most salient justification being that you ordinarily will have paid tax on the money before you then invest it. But even taking that into account, our system has a series of concessions that have been clearly distorting investor behavior, and in particular, they’ve been distorting the housing market.
And we see that in terms of the sheer volume of money that’s gone into particularly established housing through people borrowing money to buy investment properties, and it’s a very particularly Australian phenomenon. It’s not the only reason for our house prices being some of the highest in the world, but it is one of the major reasons, and it is the one that sat in the too hard basket.
The government is properly focused on housing supply and building more homes, and that’s the correct thing to do. But ultimately, if it really wanted to demonstrate that it was committed to making the housing system work for all Australians, it needed to get into the way in which our tax system is interacting with incentives for people to put their money into housing.
What they’ve done on negative gearing and what they’ve done on discretionary trusts are wholly aligned with what Grattan has recommended, and has recommended for a long time. So we’ve said that you shouldn’t be able to use negative gearing to use losses in your investments to offset them against your wage income.
That’s an unusual thing that we have in Australia that other countries don’t tend to have, and the government’s putting an end to that. So obviously, if you make losses, you can offset them against the income that you get from an asset. But you can’t take your, say, your property investment losses and offset it against your unrelated salary income as just as a way of avoiding tax.
We’ve also long made this recommendation around a minimum tax on discretionary trusts. This is not something that everyone is entirely familiar with. It’s used by a portion of Australians, but not all Australians. But it’s a structure whereby people can distribute money in their family unit in a way that reduces how much tax they pay. It’s a thing called income splitting, and it is a way that the people who are able to pay tax avoid paying similar tax rates to others who earn the same amount of income.
The capital gains tax discount has gotten a lot of attention. So what they’ve done is they’ve effectively unwound an excessively generous discount that was introduced in the Howard era, the 50% discount, and instead put in place a discount that does effectively what a discount’s meant to do, which is to account for inflation. And so instead of approximating inflation, they’re just putting in an inflation adjustment, so you only have to pay tax on the money or the profit you make after inflation.
The other thing they’ve put in, which is really valuable, is a minimum 30% tax rate. And the reason for this is because the data’s really clear that what people are, have been doing is selling their investments in a way that avoids a tax rate that they would normally pay because they’re normally quite high income earners, but they time their transactions in a way that they can pay a far lower level of tax.
And what this means is over the course of someone’s lifetime, they might be a really high income earner, like someone who earns over $800,000 a year. For those familiar with Grattan’s budget cheat sheet will know that is really the top end of Australian earners.
The purpose of the minimum tax rate is just to mean it doesn’t matter when you do it, you’ll pay a flat rate of tax, and so apart from the fairness objective, if we’re thinking from an efficiency perspective, that reduces that distortion where people are effectively doing things in the market with their assets, with the timing driven by tax treatment rather than the timing driven by the fundamentals of the decision they’re making.
On housing, the important impact of this isn’t necessarily that it’ll bring down prices substantially. We don’t anticipate that it will. Treasury anticipates a price impact of about 2%. The real impact is in shifting the composition of who buys houses by making the tax treatment less preferential for investors and therefore tilting the balance a little bit more in favor of home buyers, so people who are buying a home to live in it.
And so that’s what we can expect to happen over time, and these measures will take a few years to come into effect so people can organize their affairs.
But fundamentally, if we want to make housing more affordable, what we need to do is build more homes, and that’s where they’ve set aside $2 billion to pay the states to do planning reform and zoning reform. That’s the stuff that’s really gonna shift the dial in terms of there being more homes available in the places that people want to live.
Erin-lea Brown: Alison, the run-up to this budget has been heavily focused on energy and energy security. As we all know, the conflict in the Middle East has sparked heated debate on energy sovereignty and better security measures. In the last month or so, there’s been a pretty large push for a gas tax across both sides of government, which had also been picked up by the public.
And so the impact of the last two months must have reshaped the government’s energy priorities. How do you assess this budget as having balanced those short-term energy security needs we have with longer-term decarbonization?
Alison Reeve: Erin, it was really evident in the Treasurer’s speech last night just how important oil prices have been to shaping this budget.
At the beginning of this year, they were at around $60 a barrel. They’re now around $100. And the forecast that Treasury has is that they’re gonna stay at $100 at least till the end of June, and then they’re gonna come down a bit over the next year to $80, but they’re still gonna be pretty high compared to what they used to be.
Treasury’s forecast is that inflation could be as high as 5% by the middle of the year, and that growth is gonna be lower. Now, they also did another scenario, which was a bit of a, a worst case scenario, where prices peak at $200. They stay high for three years, and in that kind of world, we’re looking at 7% inflation and much higher unemployment.
I am not gonna get into a mugs game of saying whether Treasury’s got the oil price right or not, because at the moment, this is just such a fluid and unpredictable space, it’s actually really hard to say. But you can see the way that this has flowed through in some of the spending measures announced in the budget is we’ve got a group of them that are meant to act as buffers against that oil price swinging around, and then there are other ones that help reduce our long-term exposure to the oil price.
So the ones that are gonna buffer us, the two big ones there are $7.5 billion to help underwrite fuel and fertilizer imports and $3.2 billion for a national fuel reserve.
On the first one, it is likely that a lot of this actually won’t be money that gets used. It’s just there to underwrite and risk-share with importers of particularly fuel, so that we keep the flow of fuel coming to Australia, we keep our minimum stockholding high. One slight concern around it is there’s not a huge amount of transparency here about how much commercial risk is being transferred onto the government. All of these businesses live with price risk all the time, and that’s actually something that keeps the supply chain efficient and functioning well.
On the second one, the national fuel reserve, we haven’t seen the design for this yet. The amount of detail that we’ve got is that there’s gonna be some sort of new entity that’s gonna buy and sell fuel. This is basically a shift to a mixed market in fuel, which is not something that we’ve had before.
And so I’m really gonna be watching to see whether we have some safeguards there, both to stop it from profiteering, you don’t want the government to be buying fuel when it’s cheap and selling it to Australians when prices are higher. But also, we don’t want this reserve to start to be used for political purposes. You can see a world where, if the government’s sitting on a whole lot of fuel and petrol prices spike for some reason, there’ll be calls to release that fuel into the market in order to push the price down, and that’s just subsidizing the fuel use, right? That’s actually not giving us the right long-term signals to make sure the people who most value the fuel are getting the fuel that they need.
I also said that there’s a couple of things that are about reducing our long-term exposure. I think the biggest one there was an announcement that they made in MYEFO, which was a billion dollars for low-carbon liquid fuels.
So these are drop-in fuels like petrol and diesel and aviation fuel, but they’re not made from oil. They’re made from plant waste, agricultural waste. So this is about being able to make our own fuel in Australia in a way that’s consistent with getting to our net zero targets. The other thing that they said, and it’s something that Grattan’s been advocating for since 2021, is to also work with industry to design a target for the use of those fuels, and that’s a really important demand driver. That will be saying to people, like airlines, mining companies, and so on, “You have to use a certain percentage of this low-carbon liquid fuel.”
The other big thing that they did was they decided to keep the electric car discount That had been costing the budget a lot more money than was originally forecast. What they’ve decided to do is to put some limits on how expensive a car you can get underneath this, and to phase that discount down over time. That is better than slamming the brakes on this sector, if you’ll excuse the pun, but it is actually probably still quite an expensive way to encourage more people to buy electric vehicles.
I’m really hoping that later on in this year when they review the new vehicle efficiency standard, we will see a little bit of a stronger measure there to push more electric cars into the market without having to give people this big discount in order to do it.
Erin-lea Brown: The government’s previously announced Future Made in Australia agenda included some big cash grants and tax credits for future clean industries.
But this budget shows that some of that has been clawed back. Alison, what do you think is going on there, and what might it mean for industries wanting to access these schemes?
Alison Reeve: All up, my calculation is that there’s a couple of billion dollars that were clawed back. A lot of that was money that had been earmarked for the development of a hydrogen industry.
One of the reasons that money hasn’t been spent is because they threw way too much money at that industry before it was ready to absorb it. There were literal multiple billions of dollars on the table through a program called Hydrogen Headstart, and then also through a tax credit.
The green hydrogen industry produces about $10 million worth of product annually. It is not an industry that can absorb billion dollars in tax credits or in structured funding. I think the government has done the sensible thing by claw some of that back, and also restructure part of the rest of it. And hopefully, that will be structured towards something that’s actually gonna be more effective for an industry that is still very nascent.
I think the real lesson here for government is to spend a little bit more time working with the industry and doing your research before you actually start putting great gobs of money into it. For industries to develop properly over time, the funding needs to be structured different at different stages of development.
We’ve seen that in the renewable energy sector. There is still plenty of money around for new green industries. I think this is about being a bit more sensible about how we do good, structured industry policy that brings about transformational change in the industrial sector.
Erin-lea Brown: Thanks, Alison. Another significant story in this year’s budget was the NDIS, which has become a central topic in Australia’s fiscal debate. The NDIS has transformed the lives of hundreds of thousands of disabled Australians and their families, and it is a vital part of Australia’s social fabric. But the program has been growing at a rapid pace, and there were serious concerns that the program was at risk of losing a broad-based social license.
Major reforms to the scheme were announced back in April by Federal Health Minister Mark Butler.
Sam, in the budget papers, there was some detail on how the reforms impact the forward estimates for the NDIS. What did we learn last night?
Sam Bennett: Erin, we learned quite a few new things.
NDIS savings are really the centerpiece of the budget repair aspect of this federal budget, and given the scale of them, there’s an argument that the single biggest measure within it. And what we see builds out from those announcements that you referred to in April, and I think you saw government lining up many of the right issues in that reform package to tackle, including in ways that Grattan’s previously recommended.
Tightening the eligibility criteria to clarify who the scheme’s really for. More direct government intervention in the market, including to secure better value where that’s warranted, and a rebalancing of the NDIS, as we described it, so that there are more disability services outside of that scheme, and I’ll come back to that.
It wasn’t so much new substance we saw in the budget announcements. It was more about the cumulative impact of those measures and how they washed through those forward estimates. There’s a total saving attached to these measures of 36.6 billion through to 2030. That’s fully 60% of the overall savings in the full federal budget.
That means the scheme will grow at a little over 1%, 1.1% over the next four years, so well under inflation, of course, and lower actually than Minister Butler announced back in April. And by 2030, the scheme will be about 23% or 16.5 billion lower in cost than it otherwise would have been.
So we really are in a different paradigm now. This is no longer about growth moderation, this is actually now about reducing the size and cost of the program in real terms. So in the ’27, ’28 financial year, you actually see a projected contraction in the scheme of 1.9%, and that coincides with the introduction of eligibility changes that the minister talked about.
We’ll see a new assessment that comes online in January of that year to ensure that only people with higher levels of need get onto the program. Minister Butler referred to that resulting in about 160,000 people coming off the scheme, but the impact’s actually bigger than that because it will also slow the rate of new entrants. So the combined impact is about 300,000 people that would previously have got onto the scheme under existing policy settings that won’t be supported by it in 2030.
So the budget papers basically confirm what a central part of the savings package that specific measure is.
But if we turn to the ’26, ’27 financial year, we see a growth rate of 4.4% projected in that year. So less dramatic than minus one point, but still a big stretch from the over 10% that we see today. And that moderation can only result from some of the shorter term measures that were recently announced. Frankly, some of the blunter measures in that package, because the larger structural changes that I’m very broadly supportive of won’t come online until later.
So that’s where I do have some concerns. We talked in our work on saving the NDIS about the importance of government not hitting the target but missing the point, meeting its growth moderation targets, but doing that in a way that actually makes the scheme worse for people that rely on it. And there’s nothing in these budget papers necessarily that to mitigate that concern.
So what will be driving that growth moderation next year? We can be pretty confident it won’t be coming from fraud and integrity measures. Combined spending on that over the last five budgets is over 750 million now. And while combating fraud is really important, it simply isn’t a big contributor to savings, which means that next year’s growth moderation is most likely to come from slowing down plan reassessments and from cuts to social and community participation budgets.
The NDIS was supposed to help disabled Australians thrive, including by having the support they need to get out and about, and to be active and contributing members of their communities. So I can understand why the government feels this is necessary, but it’s also a pretty blunt measure, and it’ll be difficult to implement that without eroding some of the actual purpose of the scheme.
The other thing we saw in this budget is the inclusion of federal funding for foundational supports. So those are supports outside the NDIS. We’ve got the federal government’s 50% share of a 10 billion commitment agreed at National Cabinet late in 2023, and that’s both two billion committed to the Thriving Kids initiative and a further three billion as yet unallocated, and there’s another 200 million in there for this new Inclusive Communities Fund.
And remember, it took all governments two and a half years to agree to Thriving Kids. But we have this looming commencement date for a new NDIS eligibility assessment of January 2028, so if they don’t get their skates on with establishing these new services, we’re at risk of seeing people cast adrift from the scheme without the support that they need.
And then I think the final point I would make is what a huge implementation challenge all of this is, building on top of other NDIS reform packages from previous budgets. And tucked away in there in the budget papers, we also see the federal NDIA, the National Disability Insurance Agency, that will have a lion’s share of the task in implementing these measures, required to do so at the same time as absorbing a 39% nominal drop in operating costs by 2030.
So that’s no small ask, and the consequences of not delivering those savings would be huge
Erin-lea Brown: Thank you, Sam. We couldn’t do a budget podcast without talking about productivity. It has been a hot topic following the Economic Reform Roundtable in August last year, and the Treasurer Jim Chalmers has repeatedly said that productivity is central to the government’s economic strategy.
But productivity can sound a little bit abstract. Aruna, what does it mean in everyday terms, and did this budget do much to improve it?
Aruna Sathanapally: Really what it means is how do we get the most out of our effort? How do we get the most out of our resources? And if we look at what’s made our lives better over time, it’s the fact that we get a lot more for our resources and our efforts today than we did previously.
And what is responsible for lifting living standards over time at the aggregate level for everybody is the ideas, it’s the new technologies, it’s the new ways of doing things. Now, not all of that is measured in our economic statistics, but it is the case that every time you do a set of economic forecasts, one of the really important things you’re looking for is what’s happening with that rate of productivity in the economy.
And if that isn’t growing, then economic growth is basically just down to having more people or putting in more hours in terms of work. And so you really want that thing to grow to see living standards lift over time.
In this budget, there is a really broad suite of measures that are directed towards improving productivity. Many of them are not so much about splashing big buckets of money around. They’re about bringing down regulations or just getting the seven jurisdictions in this country to do the same thing. And so the government’s articulated in this budget what that agenda is, and really the task from here is gonna be delivering on that.
Erin-lea Brown: Thanks, Aruna. There’s no doubt that this budget is doing a lot, but there are a range of good ideas that have been left on the cutting room floor. Budgets are as much about what governments choose not to do as what they choose to do.
Alison, what stood out to you as missing from this budget?
Alison Reeve: There are three really big examples that I saw which felt like missed opportunities to me.
The first one is the reform of the fuel tax credit. So fuel tax credits are refunds of fuel excise. They mostly get paid out to the mining industry, and they’re really strong disincentive for fuel users to reduce their use of imported fuel. Our former colleague Marian Terrill, has found that if we restructured that credit system, we could be saving $6 billion a year.
The second one I would pick up on is the tax on gas. The reason that this is happening is because the petroleum resource rent tax is broken. It’s just extremely easy for companies to make a lot of profit and not pay tax on that profit. The government really needs to fundamentally reform this tax or just replace it with something that gives Australians a fair share of the profit that these companies are making.
The third one I was gonna pick up was something that also came up at the Productivity Summit last year, and that’s road user charging. I think the government probably put this off because of not wanting to put a disincentive in place for electric vehicles.
I can understand that, but I think this is something where they are going to have to pick this up in the next budget . We know a lot of people are looking to buy electric cars because they want to protect themselves from fuel prices. This means that the decline in fuel excise is likely to accelerate because there will be fewer people buying petrol, and that’s gonna start to leave a hole in the budget over time. They need to get onto this because the more people who buy electric vehicles, the more politically difficult it becomes to introduce a road user charge because there’s suddenly a bigger constituency who gets affected.
Erin-lea Brown: That’s all we have time for today. Thank you, Aruna, Alison, and Sam, for providing your expert analysis on this year’s budget. Thanks for listening to The Grattan Podcast. Our research, reports, and analysis are freely available thanks to the donations of listeners like you. Please consider making a regular or one-off donation at grattan.edu.au/donate.
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