Treasurer Jim Chalmers handed down his first budget on Tuesday night, amid the usual fanfare of speculation, promises, posturing, and of course, photo ops.

In this special Grattan podcast episode, Danielle Wood, CEO, and Kate Griffiths, Deputy Program Director, cut through the fanfare to the heart of this federal budget, and what it means for Australia’s economic future.

Transcript

Kate Griffiths: Treasurer Jim Chalmers handed down his first budget on Tuesday night, amid the usual fanfare of speculation, promises, posturing, and of course, photo ops. In this special Grattan podcast episode, we’ll cut through the fanfare to the heart and guts of this federal Budget. I’m Kate Griffiths, Deputy Director of Grattan’s Budgets and Government Program, and I’m joined by Grattan’s CEO, Danielle Wood.

who was in Canberra for all the action. Welcome, Danielle. Thanks, Kate. It’s been a, an unusual year with two federal Budgets, much to the delight of economists. When we sat down together earlier this year, Dani, to dissect the March budget, we were talking about a classic pre-election budget full of sugar hits.

How does the October budget compare?

Danielle Wood: Yes, two budgets is almost too much excitement for one year. look, so I would say there’s definitely less sugar. This time around, both budgets. commodity prices have been very, very kind to us for a couple of years now, you know, each time a budget is delivered company tax is massively outperforming relative to forecast.

we also now also have the added bonus of very low unemployment, which is boosting income tax receipts, probably less of those, unexpected windfalls have been spent this time around. So, in net terms, about 50 billion. extra, coming to the budget bottom line because of those, broader economic conditions.

About 80 percent of that has been banked and about 20 percent going out the door in, new policy commitments. Largely ones that, were announced in the election, things like childcare, lower costs for prescription medicine, social housing. But very clearly the treasurer’s emphasised restraint on that front.

not adding to the broader inflationary pressures in the economy, and with an eye as well to some of the long-term fiscal, the fiscal challenges. Also different to the March budget, the government did manage to find some savings, maybe not as many as will be needed in the longer term, but the waits and rorts audit that we heard a lot about in the lead up to the election, did see the government cut back some infrastructure projects, including the, the big Hell’s Gate.

dam project worth 5 billion. there was also the end of, of some of the, the grants programs, particularly the ones that had been, used pretty extensively for port barrelling by the previous government. So, things like the building better regions funds and the community development grants, had a line put through them in this budget.

Kate Griffiths: You mentioned some of the long-term economic challenges. I want to get to that, in a little bit, Danny, but first maybe let’s, let’s talk to the current economic environment, which has changed a lot since March. We’ve seen inflation shoot up dramatically exacerbating existing cost of living pressures and a significant downgrade in the economic growth forecast.

And then some of those earlier challenges that we were experiencing in March are continuing, including obviously the war in Ukraine and a further flooding in New South Wales, Queensland, and now Victoria. How did you think the government responded to those sorts of pressures in the budget?

Danielle Wood: It’s clearly a very challenging environment and you know, ultimately those, all those things that you just pointed to, Kate, are creating significant pain for households.

We see it in the budget numbers that real wages are forecast to go back substantially this year. The energy price forecasts were pretty eye watering, you know, 56 percent increase in electricity prices over the next two years, 44 percent increase in gas prices. There was some pretty, scary words on what might happen to rent as well.

so, you know, clearly there was, pressure on the government to act on some of those fronts. I think they have largely been right to hold the line on new spending. You know, we certainly don’t want fiscal policy and monetary policy pushing in different directions. And every dollar that the government puts into the economy, does make, you the Reserve Bank’s job harder.

That said, you know, I would argue that at least some very targeted relief at the most vulnerable might have been warranted, particularly an increase in rent assistance. We know that those payments are just massively lagging market rents and that’s creating all sorts of problems in, accessing housing for the most vulnerable.

On the disaster side, there was actually, you know, quite a substantial allocation in the budget for disaster relief, over the forwards, about seven billion dollars, about three billion of that sitting in the contingency reserve. So, planning for, for future costs. And so, I think we are starting to see that that increased prevalence and amount of natural disasters that hitting the budget in a sizable way, you know, on energy.

I’m going to mention those eye watering price increases. I think there is increasingly pressure on the budget on the government to act probably through a regulatory route. And certainly, it seems like they are thinking about things like potential price caps. That would be a very big step for the government to take.

But, when you see those kinds of numbers, it’s difficult to imagine that they, they won’t take some form of action to, to give households relief. So, I think overall they’ve, they’ve walked the line pretty well. but none of that, you know, is really going to help with the challenges that a lot of households are going to be facing to their budgets over the next year or so.

Kate Griffiths: Getting to the big announcements in this budget, obviously there, there’s usually some, some kind of big initiatives. There are a few in this one. Childcare, you’ve mentioned already, social housing. Perhaps, can you talk us through, what the, what the big items were?

Danielle Wood: Sure. So, the single biggest was more affordable childcare, which was obviously an election commitment of the government, a bit under 5 billion over the next four years.

that’s really about, reducing out of pocket childcare costs for families. and we, we certainly, hopeful that by making childcare more affordable, that will increase, opportunities for second earners who tend to be mothers to participate more in the workforce. So, it really sort of gives an economic dividend.

other big commitments, improvements in aged care. Also, something we heard a lot about in the lead up to the election. that’s delivering some of the recommendations of the Aged Care Royal Commission. So, increasing the amount of care minutes that patients receive. having aged care nurses on facilities available 24 hours a day.

that is also a sort of sizable spending commitment. there’s an increase in overseas development aid that actually didn’t get much attention, but, increased funding, particularly for projects in the Pacific, the commitment to, to fee free TAFE places. So those were the sort of the biggest new spending commitments, none of which were, of course, a surprise.

They were, they were all things that they needed. The government had been spruiking quite heavily as part of their election platform.

Kate Griffiths: Yeah, absolutely. And then the one I suppose that wasn’t in, in the election commitment list was paid parental leave. And that was one that we heard about just in the week or so leading up to the budget.

As far as surprises go, that’s perhaps the closest we got in this budget. can you tell us a bit more about those changes?

Danielle Wood: sure. I mean, that was certainly a positive surprise from my perspective. it is a policy to essentially expand the amount of paid parental leave available to families. 26 today to 26 weeks, that’s going to be phased in over time.

So, people won’t be getting the full 26 weeks until, 2026. The other, really important component of that change. which we don’t have the exact policy design yet, but certainly a signal from the government is that they want to make leave more gender equal. so, more flexibility to families as to who takes leave, but on top of that, a use it or lose it component, which will apply to both parents.

And what, what we know, from our work at Grant and Kate is of course that, when you actually set aside leave, particularly allocate it to dads and partners. That’s what you really need to do to, to drive dads to, to take time off in that sort of crucial first year. And we know that habits that are set up in year one tend to persist.

So, dads that are more involved in the first year tend to stay more involved. And so, you end up actually with a more equal sharing of, of paid and, and unpaid work. between parents. and that’s, you know, really crucial if, if we’re looking at things like boosting women’s workforce participation and trying to narrow the gender pay gap over time.

Kate Griffiths: It’s obviously got some big benefits for children and for dads themselves too.

Danielle Wood: Exactly. Yeah. So that, that’s the economic rationale, but yeah, all the research suggests it’s good for, relationships, good for dad’s mental health, good for children. so, you know, we’ve, we’ve always argued that that policy is a win, win, win.

So, it’s really, really nice to see that get picked up.

Kate Griffiths: That’ll be a longer rollout, but, but good to see the plans in place. The treasurer promised a new approach in this budget, a new approach to budgeting more generally, a wellbeing approach. So, I wanted to talk a little bit about how that, manifested in this budget.

we saw a chapter, in the budget on wellbeing called Measuring What Matters. Can you tell us a bit about how this differs from the normal process?

Danielle Wood: Sure, so the normal budget papers are very focused on different measures and what they mean for the budget bottom line. you know, the numbers that we see up in lights on budget night tend to be the budget deficit or the debt levels, or the GDP forecast.

so, what this is trying to do is just broaden out the focus of the discussion. Budgets are about, you know, making decisions that will impact Australia’s future and just saying what are the, what are the other things we care about? you know, what actually matters for how people feel about their lives.

The wellbeing chapter in this budget. talked about different ways of measuring those things that matter. Broadly, actually, when you look around the world and in different countries that go through this exercise, you know that the categories tend to be pretty similar, right? We care about health, we care about education, we care about the environment, we care about safety, we care about our democracy.

So, all of those types of things you might want to measure. The chapter in the budget focused on using the OECD. Framework, which I think is a really great place to start. We don’t want to reinvent the wheel. It is saying that we might tailor it a little bit more for the Australian conditions. This is something that once we have a set of indicators, I expect we will see those indicators tracked through every budget and hopefully it starts to broaden the conversation.

The other thing you really want it to do is to sort of take. The consideration of policies going into the budget beyond the short-term political cycle, so beyond that three-year cycle, and allow the government to make decisions. That will shift the dial on those indicators over a longer-term time horizon.

So that, that’s really kind of what we’re trying to, or what’s trying to be achieved with a wellbeing budget. I think it was a good start and hopefully, as we bed down those indicators and it starts to get more prominence, that will start to shift the decision-making framework.

Kate Griffiths: Yeah, and the treasurer said that we’ll hear some more on that next year, I think, with an additional wellbeing statement or a statement on this, this budget.

Danielle Wood: Going to get its own budget book.

Kate Griffiths: Yes. So, beyond the announcements, the budget also gives us a peek into the future, on government finances. What did this budget tell us about the federal government’s finances over the medium term?

Danielle Wood: Look, I think this was probably the most sobering part of the budget.

You know, I expected those medium-term numbers to, to look quite challenging, but it was, even worse, I think, than many of us had expected. We see over the 10-year horizon, government spending increasing to about 28 percent of GDP. That is much higher than it has been historically. Just to give you a sense, it tended to average about 25 pre pandemic.

And tax revenues will also creep up as a share of the economy, but nowhere near to the same point. So, we’ve, we have a sort of structural deficit of about 2 percent of GDP over the medium term that is big contributing to that. We have some really fast-growing spending programs. The NDIS received a lot of attention on budget night scoring 14 or just under 14 percent a year on average each and every year over the decade that is really challenging and frankly, it will need a close look to make sure that that is sustainable, but it’s not the only thing growing fast.

We see health and hospital spending, aged care spending, defence spending, you know, all growing substantially faster than the broader economy and creating pressures. So that, I think, is going to be, setting up to a big challenge for the government in the May budget. Ultimately, they are going to I have to try and close that structural deficit by looking at both sides of the ledger.

You’re going to have to look at spending and some of those big and fast-growing programs. They’re going to have to look at the revenue base and where it is they can raise more money, hopefully without creating too much economic cost. And, you know, when the treasurer talks about having a conversation.

You know, that’s really what he’s getting to.

Kate Griffiths: The other long-term risk that the budget points to, maybe for the first time even, actually, this federal Budget mentions the risks around climate change and what that can do to government finances. This is an area of enormous uncertainty, of course.

Danielle Wood: Yeah, it was.

And I think it’s, it’s, it’s important. I mean, so the corporate world’s probably well ahead of governments here in a lot of ways. I mean, you can’t really think about government finances and, and assets and things without factoring in some of these longer-term risks. And there are so many different ways that climate change will impact ultimately on the budget.

cost of natural disasters where we’re already seeing. And as I said, there’s some pretty serious money committed to that over the next four years. You know, those pressures are only going to grow over time. there are impacts on, on productivity. you know, time loss due to like heat waves, impacts on agricultural productivity, health impacts, all of which are going to, to feed through into government financial positions.

So, understanding those mechanisms and how big those things are is incredibly important. So, it was good to see it get, Discussion in the budget ultimately is going to have to feed through into the numbers. And I think the intergenerational report next year will be sort of an important 1st step in that.

I mean, it’s 1 thing to think about the next 4 years and not factoring climate change. And frankly, it would be mad to do an exercise where you’re projecting out 40 years, and not factor it in. So, I think, you know, that, that will really be where we, we start to see how big these numbers might be for the first time.

Kate Griffiths: One final question for you, Danny, the next budget being only six months away, we’ve already spoken about some of the medium-term challenges that the Treasurer will have to turn his mind to. What do you think the big things are that will need to be in the next budget?

Danielle Wood: Look, I think there will have to be some substantial movement, or at least a sense of direction, on how we are going to contain spending.

Particularly in areas like NDIS and defence. Tax, the conversation really has to start now if there’s going to be movements, by the, the May budget. So, I think, you know, we should be looking at the stage three tax cuts, whether that is, to, Sort of reorient the package and reduce its fiscal cost. I would actually like to see it used to enable more significant tax reform, bundling in the tax cuts with some policies to reduce leakages to the income tax base, things like super tax concessions.

Negative gearing, capital gains, tax discount, family trusts, all of things which allow the well advised to reduce their income tax bills. You know, I really think we have to question, how sustainable some of those tax concessions are. And, you know, if you did some of those things at the same time as the tax cuts, most people would still be getting a tax cut, but you would significantly reduce the fiscal cost of that package and actually buy yourself a more sustainable tax base over time.

You know, those are things that could all be in the mix. none of them are easy. And, you know, this is why I’m not so critical that there wasn’t these kind of big pieces rolled out in the October budget. I think you do need time to kind of bring the public along and to have those conversations and to work out where the biggest priorities are.

But, you know, frankly, you can’t look at those medium-term numbers and not expect some seriously hard decisions to be taken in May.

Kate Griffiths: Some tough choices around the corner, for everyone. Budgets at least give us a moment for these sorts of important conversations and ultimately provide a window into the government’s priorities.

We might wrap up there for today, but thank you for sharing your expertise with us, Dani. Thank you. If you’d like to learn more about Grattan Institute’s research, all our work is freely available on our website at grattan.edu.au. You can subscribe to our podcast and newsletter on our website or follow us on Twitter at Grattaninst and all other social media at Grattan Institute.

Our budget analysis is freely available thanks to the donations of listeners like you, so please consider making a regular or one-off donation at grattan.edu.au forward slash donate. for joining me today.

Kate Griffiths

Chief of Staff and Democracy Deputy Program Director
Kate Griffiths is Grattan Institute’s Chief of Staff and Deputy Program Director of the Democracy program. Kate completed her Masters in Science at the University of Oxford as a John Monash Scholar and holds an Honours degree in Science from the Australian National University.

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