Federal Budget 2024: The Grattan verdict

What’s Grattan’s verdict on Budget 2024?

CEO Aruna Sathanapally and a panel of Grattan experts, including Dr. Sam Bennett, Alison Reeve, and Brendan Coates, critically assess Australia’s 2024 federal Budget.

Has the government got the balance right in supporting people who are doing it tough, without exacerbating inflation? Does the Budget do enough to help fix the broken housing market and tackle Australia’s structural budget deficit? And will the government’s ‘Future Made in Australia’ investments help or hinder our transition to net-zero emissions?

Find out what the Budget means for you and the nation in this special podcast.

Transcript

Kat Clay: Today we have a special podcast for you. It’s the recording of our recent discussion around the 2024 federal Budget with four of our top experts discussing their highlights and key takeaways from this year’s budget. We kick it off with our CEO, Aruna Sathanapally.

Aruna Sathanapally: This year’s federal budget was a classic good news story, offering a little bit of something for everyone with very little in the way of explicit spending cuts and no new taxes. I’m going to give a brief overview of the budget headlines in a moment and some of the near term picture, but then we’ll focus today on three of Australia’s longer term challenges, the housing crisis, the transition to net zero and the structural budget position and what this budget did or didn’t do to tackle these challenges.

On our panel today, we have Dr. Sam Bennett, who leads Grattan’s newest program on disability. Alison Reeve, who works on energy and climate change, and Brendan Coates, who leads Grattan’s work on housing, superannuation and migration.

So, because that’s quite a lot, let’s get started. I’ll start with a brief overview of the budget headlines.

Treasurer Jim Chalmers has delivered two surpluses in a row and it’s a long time since anything like that happened. But this is short lived. The forward estimates, that is the budget position that’s expected over the next four years as well as the medium term past the next four years over the coming decade are all expected to be deficits as the spending expectations for the government ultimately outpace how much tax we’re raising. One of the things that the Treasurer has experienced is a decent chunk of good luck. That’s because the circumstances in the economy, and the circumstances in particular with prices for some of the main things that Australia exports have been doing pretty well and better than the Treasury previously expected them to.

So what you can see on this chart is those orange bars represent the changes that have come about from broader circumstances to both revenue and expenditure. So there’s some downside there too. And then in red, you see the changes that are down to active policy decisions that the government has made.

Chalmers, to his credit has taken the upside and put it in the bank, or rather put it against Australia’s debt rather than spending it, which is a sensible thing to do. But we haven’t really seen spending decisions that have made our fundamental budget position any better.

You’ll see that largely this budget is a spending budget with spending measures coming across the board, quite significant spending in defence, spending on the measures in relation to medicines under the PBS, but also spending on rent assistance, a small amount of near-term spending on Future Made in Australia on housing support.

And on Medicare, and this reflects the focus of the budget on cost of living. The most significant savings is from the NDIS, but we’ll get to that shortly because even these savings really only counteract the growth that NDI has is expected to achieve this year. And then just the final thing before we move on to some of the long-term challenges is the big question about inflation.

 One of the things that’s come up quite prominently is that the budget has an expectation that inflation will drop more quickly than the Reserve Bank thought or forecast about a month ago. The first thing to say is that ultimately these are pretty small differences in the broad context of things.

Aruna Sathanapally: There’s already been quite a significant drop in inflation since the highs we saw about 18 months ago. But one of the really prominent things this budget seeks to do is to bring down measured inflation quite directly through energy bill relief and through rent assistance and assistance on medicines.

That has an immediate effect in terms of the measured inflation rate, which has a bunch of consequences. But more fundamentally, what this budget expects is that the economy is cooling pretty fast. That there is a lot of household pain out there after a few years of cost of living increases, particularly with the cost of housing and that the labour market that’s been pretty strong as unemployment has stayed quite low is looking like it’s about to turn and that we’re going to start to see unemployment move up. Still low by historical standards, but higher than it has been. So that’s the broad-brush overview of the budget from the economic and fiscal side. I might throw at this point 1st to Brendan because hard to have a conversation about public policy these days that doesn’t involve housing. So, Brendan, with rents rising and house prices seeming to defy gravity, has this budget done enough?

Brendan Coates: Thanks, Aruna. It is the issue that everyone keeps talking about. And, you know, what we’ve seen in the budget this year is further steps in the right direction. Has it done enough? No, probably not or certainly not, but it’s also there are limits to what a federal government can do to actually solve the set of challenges that we currently face.

So, you know, the biggest, the most important measure in the budget is the 10 percent increase in rent assistance that comes on top of the 15 percent rise last year. And that means an extra 400 dollars into the pockets of low-income renters on average that support will obviously be welcome. Is that enough?

It’s not really in the sense that Grattan’s been calling for some time for at least a 40 percent increase. We’re now at 26 percent given the base effect of a 10 percent rise on top of an existing 15 percent rise last year. But there’s also some work that we’re doing that suggests we probably, in fact, do need to raise rent assistance by more if we’re genuinely going to pull low-income renters out of poverty.

 There’s work that’s been done or money that’s been announced in the Budget around some funding and new Commonwealth state agreement on housing to update the old National Affordable Housing Agreement. So, most of that looks like it’s, you know, it’s obviously new money in terms of expenditure that’s committed, but it’s really sustaining what the federal government has given to the states historically.

And that money is not really used to build, say, new social housing, but it’s used by the states to really fund the existing and support these and maintain the existing social housing stock that they largely run. There is some new money there for a doubling of support for homeless services to 400 million, provided the states you know reciprocate there’s a billion dollars to support housing related infrastructure through the National Housing Infrastructure Facility and there’s a billion dollars reallocated to provide crisis accommodation for those fleeing domestic violence.

So, there’s a great bag of things, all of which, you know, look pretty good to us. They’re all moving in the right direction, but they’re not at the scale that you really would hope to see if you were really trying to solve this, the issue for government, obviously, is they’re trying to do this in a world where they’ve got constraints on their spending because of inflation.

And I think we should count ourselves very lucky that, you know, 15 years ago, the ABS made the decision to treat in the rental CPI to offset housing subsidies against that, because I think otherwise, we wouldn’t be seeing the suppression inflation here. And we probably wouldn’t have seen the government do it.

There are obviously things we need to see, you know, Grattan’s called for a doubling of the social housing future fund to 20 billion dollars or the HAFF as it’s currently called. That would unlock another 30, 000 social affordable housing dwellings. We’d hope to see that before the election, but then we’re just in a world where you’ve got, you know, the tsunami of rising materials prices.

You know, the rising cost of labour with shortages in skilled trades, given they’re competing with the infrastructure boom and financing frictions from higher interest rates, that just means it’s going to be really hard to build more housing and ultimately, these are decisions, the levers there to build more housing do largely sit with the states, they’re the ones that have to reform planning rules that would allow more housing to be built, and there I suspect we’ll have to see action from the federal government where they’ve put 3. 5 billion on the table to help the states to pay the states essentially to undertake planning reforms. But the baseline at which those payments kick in, they it’s a 15, 000 payment for homes built over the next five years. If they build greater than their pro-rated share state share of the 1 million home baseline, we’re going to have to relook at that because given the supply constraints, that’s probably not an appropriate baseline for those payments to kick in.

And that’s something that’s going to have to be negotiated with the states down the road.

Aruna Sathanapally: This is a problem that’s probably two decades in the making, and we’ve let it get to a point where it’s, it’s all hands on deck, but it’s good to see some measures in this federal Budget, at least. Alison over to the other hot topic of the moment: energy and climate change.

Will the initiatives in this budget, and I’m talking particularly about Future Made in Australia, help or hinder our transition to net zero?

Alison Reeve: That’s a really good question. Future Made in Australia is a package worth probably about 22 billion which is a number that makes a big sound when it hits the table.

A lot of this is actually less about reducing Australia’s emissions directly and more about repositioning the economy so that it can continue to grow and flourish in a net zero global context. The big-ticket items in this are two sets of tax credits. And they’re both aimed at building up new industries that use our traditional strengths.

So, things like mining and resource exports and combine those with the natural endowments we’ve got of renewable energy and also a lot of the new economy minerals or critical minerals as they’re known. And sort of encouraging industries that are putting those two together to build replacements for coal and gas exports.

So, this might mean things like green iron and green steel, it might mean things like lithium processing, you know, making more cobalt, making more nickel, which are all used to make power electronics and batteries. The government has also nominated hydrogen, which could be an important replacement fuel for gas and coal in some industrial settings and for the chemicals industry.

It is good that the government has recognized the need to move on this. A little over 75 percent of our commodity export income comes from commodities that are emissions intensive. So, either in how they’re used or in how they’re produced. And if we can’t pivot towards commodities that have a lower carbon footprint as the world moves towards its net zero goals, then we’re going to lose that income.

So, it is good that the government is moving towards this to make the big shifts in the economy that we’re going to need to make. There are definitely market failures and barriers there that justify government investment. They’ve also put in a thing called the National Interest Framework, and that as part of this package, we’ll set out some tests for investments by government as part of future made in Australia.

So, the point of those is to make sure that the money isn’t just being sprinkled all over the place, that it is genuinely going to areas that will sort of build those future industries that can stand up by themselves. There’s also an initiative in there about battery manufacturing. I’m slightly less enthusiastic about that one.

And I might say a little bit more about that later. And there’s some other parts to the package as well, which go to things like the core funding for early-stage R& D, which is that’s a very good thing, because we need to make sure we’re investing in the next wave of energy innovation. I’d say the thing that feels like it’s, well, it’s not necessarily missing in a funding sense, but that is also because there are some real problems in the energy transition that can’t necessarily be solved with money.

And that is how we get the electricity system that we need in order to deliver on this whole vision of, you know, of being a renewable superpower. Because if we can’t get that right, we can’t actually do the other stuff. There is some stuff in the budget for, looking at things like environmental approvals and streamlining those, at looking at working with communities who aren’t happy about hosting wind farms and transmission lines and so on.

They’re not big bits of money, but they’re very important and they’re very important that they be done well.

Aruna Sathanapally: I imagine this is going to be something that, you know, we’ll be looking at closely when the legislation comes before Parliament, because a lot of the devil’s going to be in the detail.

So, Sam, over to you. You know, we have what’s called a structural budget challenge. That is, you know, we’re not raising enough money to pay, pay for the services that we have at the moment. Once we look at how those services are expected to grow. This is long been the case with our health system, with our aged care system.

But in recent years, it’s the NDIS that’s taken centre stage in terms of being one of the largest and fastest growing spending areas. What direction does this budget set for the NDIS? And does this look sustainable to you?

Sam Bennett: Following the ball with NDIS spending is sometimes difficult.

So, I’ll take our viewers through that a bit but you’re right. The budget confirms the NDIS as the third biggest program expense, which is no surprise. It was the same last year, but the funding for this year is confirmed as 44. 3 billion rising through to 60 billion by 27, 28. It’s worth saying up front in case anyone thinks otherwise, the scheme provides really vital supports to hundreds of thousands of disabled Australians. So, there’s almost 650, 000 participants on the NDIS by the end of March. And there’s a lot of great outcomes that are being achieved from that. But it’s also absolutely the case that the cost trajectory for the scheme has not been a sustainable one, probably for quite a long time now.

And as the schemes got bigger, so naturally have the concerns about its constantly escalating cost estimates. So, each time we get a budget come round the costs of the NDIS have gone up by more than was anticipated. And in that regard, this budget is no different. Now government has acknowledged that these issues, it’s trying to slow down the rate of growth.

In spending in this budget, we had a target agreed by national cabinet last May to moderate the growth to 8% by July 2026. As part of the NDIS financial Sustainability framework, that’s still a quantum higher than growth in other comparable programs. It’s worth noting. And the changes the government has in motion are estimated in this budget to save, as you said in your slides, quite a lot of money.

So, we’ve got 14.4 billion over the forward estimates. So, if you look at that in isolation, one would have to say that there are indications government’s getting a grip on NDIS spending. But the problem that you also alluded to is that between last December’s budget update and this budget, the projected costs of the scheme blew out a further 15. 9 billion over the forward estimates, which totally wipes out the savings. And means we actually see a minor increase, at least in NDIS terms across the forward estimates of 1. 5 billion through to 27-28. In a nutshell from last budget, costs went right up. We’ve had a significant tranche of savings estimated from NDIS reforms that are underway.

And now we’re more or less back to where we were. And the first major challenge with that, Aaron, there is that the 14. 4 billion in savings estimate in this budget are dependent on a number of major things, which just haven’t happened yet. The main 1 being the Getting the NDIS Back on Track Bill which currently is with the Senate passing in a form that enables those savings to be realized.

And I don’t think that’s a given. And that’s before you even consider the inevitable implementation challenges and how you make those changes while ensuring people still get the supports, they expect to need from the scheme. And the second major challenge is that making the changes is pretty urgent, but how confident can we be that by the time the savings start to be realized, the scheme won’t have blown out still further, as it did quite considerably between my EFO and this week’s budget. So, it’s hard in that context to agree with government’s assessment that the budget shows green shoots in moderating growth towards a sustainable NDIS.

There are published just this week some positive signs that the plan inflation, which is a big part of this is at a lower level than it’s been in some time. But it’d be more accurate to say that government has planted what might be some useful seeds. But we’ll just have to wait to see if they actually grow and those savings are realized.

And if they’re not, it’s worth remembering back to one of your earliest slides that would be the difference between an overall budget surplus and a deficit in this budget. And to put that in a longer context, it’s worth also noting that the revised baseline in last year’s intergenerational report had NDIS expenditure peaking at 2.4 percent of GDP. And that critical to that was the NDIS financial sustainability framework, without which the expected impact of that which would mean that GDP would be as high as 6. 3 percent of government payments for the NDIS by 2062-63. So, a lot hanging on that.

Aruna Sathanapally: When we think about it in the aggregate, you know, it seems like an intractable problem, but Sam, you and the team have been working on this. Are there opportunities to make disability services both more efficient and effective?

Sam Bennett: Certainly, there are. It’s less a case of efficiency in disability services and more a case of needing system redesign.

So that the way the scheme currently works in terms of access and how funding is determined and allocated works differently than it does today. And to its credit, that’s what government has put forward in getting the NDIS back on track bill. And there are major design flaws with the NDIS that are substantially behind the blowouts that we’ve seen, and those really need to be fixed.

The finance minister, Katie Gallagher, spoke about managing plan inflation. That’s the rate at which the funding increases in a participant plan year on year, being the key to getting the NDIS back on track. And I think that’s right. Except that some plan, inflation is inevitable. People have degenerative conditions.

People’s circumstances change. And there’s the impact of increasing labour costs and prices. And all of that means plans do go up. So, if you’re going to curtail plan inflation, which at various points over the last 18 months has been tracking at 15 percent or higher there will inevitably be packages that have to go down.

And that’s just how it works. So, as I said, that’s going to be challenging. Politically and operationally to deliver because making the right judgments consistently has proved pretty difficult and poor decisions are not without consequences. And you can’t only look at plan inflation. You also need to look at some of the other variables that impact on scheme growth.

So, there’s a number of people coming into the scheme whose plans then grow over time as well as the number of people exiting the scheme. Because the projections for that have never been achieved in practice to date, there’s a really pressing need for the early intervention pathway in the NDIS to actually do what it says on the tin in providing some short-term evidence based supports rather than lifetime supports for everyone.

And then for the number of people in the scheme we’ve got to look at those that tip from one mode of funding to another, because some types of packages are vastly more expensive than others, as much as nine times when you’re looking at someone needing 24 7 supports. So, all of that needs to be looked at, and there are levers in this bill that will help, so long as it becomes law.

But there are other things that need to happen too. There’s the seemingly precarious agreement between the Commonwealth and states and territory governments to design and invest 50 50 in the recommended foundational supports outside the scheme. It’s not a new idea, but it is a sensible one.

The demand pressure on the scheme is greatly increased by the absence of anything else outside of it, but we’re a long way from being clear on what those supports need to look like, let alone being able to rely on them as a growth containment strategy for the budget overall. And that’s evidenced by the fact that in this budget, we’ve got funding confirmed to cover the expected costs of further consultation to develop the plan.

So, it will be next budget if we’re lucky that we start to see any of that realized. And then finally, the budget has some useful measures, I think, around cracking down on fraud and beefing up the capability of the agency and the regulator. There’s sensible stuff there. 160 million to upgrade IT capacity and improve cyber security.

A further 84 million on the NDIA’s fraud detection infrastructure. And that’s important work it needs doing. But I do think it’s sometimes rather overemphasized in the debate on cost growth, where it’s unlikely to make a significant dent in comparison to some of the other things that I’ve been talking about.

So, there’s a lot that can be done to make the scheme more efficient and effective, but none of it’s straightforward.

Aruna Sathanapally: I think that both the last government and this government have tried to put reforms in. They’re very challenging. It’s a challenging area. But as you say, the something will need to be done given, you know, the cost escalation just represents something much higher than Australia can afford.

Coming across, I think, back to Alison speaking of things, things we can’t afford when the government went out with its plans around Future Made in Australia, a whole lot of, economists raised their eyebrows or, or perhaps more at the prospect of a return to a world where Government pays particular industries to get on their feet and then struggles to ever pull that money back.

Obviously, you know, Australia has a history of industry policy. It took many decades to pull out of funding things like car manufacturers. How, how do we avoid wasteful industry spending when we’re trying to support the right industries for the renewable superpower that we really want to be?

Alison Reeve: Yeah, this is literally a 22 billion question, not a 64 million dollar one. The National Interest Framework that I mentioned before is what the government has come up with to, to try and put some boundaries around where they will and won’t invest. And within that, they’ve sort of defined two streams of things they’re willing to invest in.

One stream is called net zero transformation, and that will include industries that can make a significant contribution to the net zero transition and are expected to have enduring comparative advantage. So that would be looking at things like, for example, green iron production, potentially hydrogen production, and so on.

The second stream is called economic resilience and security. And the way they’ve defined that is including industries where some level of domestic capability is necessary or efficient to deliver adequate economic resilience and security, and that the private sector would not deliver on that level.

And the question that arises there is who decides how much domestic capability is important? Who decides what level we need for security? And how do we trade that off against other options that might deliver the same outcome? Like what’s called friend shoring rather than on shoring, for example, which is where you just form alliances with friendly countries to, to get access to their manufacturing and supply chains.

As you said we’ve seen Australia prop up industries before, like the car industry, and there were some very spurious arguments around national security that were asked, were used to do that for a long time. We also, though, have, within the way that we have built up the renewable energy sector, we actually do have a good textbook example of how to do good industry policy.

And what has shown up in that is that actually what you need to do is to, as far as possible, use the power of markets to pick the winners. So, by all means, put things in there that are both subsidizing supply and subsidizing demand, but try and structure those in such a way that the market finds the most efficient use of that subsidy and delivers the most efficient outcome.

The way the tax incentives are designed at the moment is a little bit concerning. The one for critical minerals allows you a tax credit for 10 percent of your operating costs, but it’s available for existing facilities as well as new ones. And it doesn’t have a requirement for those facilities to improve the emissions intensity of their production.

So, there is a real risk there that it’s just a big windfall gain for some of our existing industrial facilities, like the nickel smelter in Townsville, for example. The government really should look at structuring that better so that tax credit is actually pushing the sector beyond what the status quo is.

The hydrogen tax credit is a little different because it gives you two dollars for every kilo of hydrogen you produce. Now, hydrogen production costs are somewhere around 10 dollars per kilo at the moment, so that looks fine. But in A lot of people’s forecasts, those costs come down very fast and in some cases, they come down below two dollars pretty quickly.

And when you get down there again, you’re getting a windfall because the government is, or the taxpayer is covering all your production costs. So, all of your sales are just pure profit. And that that’s a windfall and that’s not an industry that’s, you know, capable of standing on its own feet. So I think really what we need to see is the government putting a lot more thought before they legislate into what are their exit strategies out of these, out of those two tax credits and how do they make sure that they’re not just delivering windfall gains for people and they are genuinely changing the status quo.

Another area where potentially we waste money is by less on the tax credit side, but there was a fair amount of sort of like grant and loan funding within the package as well. And where you’re giving that to things where Australia isn’t ever really going to be competitive, which was really the way that what happened with the car industry.

There’s a package in there that I mentioned before around battery manufacturing. Now, Australia’s only got an advantage in the very early stages of the battery manufacturing chain. You know, it’s a very long chain to go from digging up minerals to actually having a battery that goes in a car. And Australia’s got advantages at some points early in those chains, but not in the later ones.

And so where government needs to be careful is if it is putting subsidies into there to build up some capability around that, that it goes into the early parts of the supply chain and that it doesn’t necessarily go into the later parts of the chain where we just get out competed by other countries because they have different company tax structures to us and they have lower labour costs and where the logistics of moving the batteries to market start to form a large part of the cost stack.

I think there’s a, a lot of room to put a bit more nuance and a little more thought around exit strategies into this whole package, because otherwise I think it could be a bit of a rent seeker’s picnic.

Aruna Sathanapally: We talked a little bit about, you know, the tax credits, obviously, you know, the good thing about tax credits, at least, is they don’t involve actively picking winners, but the bad thing about them is if you design them wrong they can end up costing you quite a lot. And sometimes it’s a cost that people don’t see as readily because it’s a tax concession. But tax concessions are still a form of spending and we’ve got some pretty big ones, which probably brings me to my, to my next question. I might, I might throw to, throw to Brendan.

We’ve talked a lot about spending. The budget has very little by way of revenue measures and nothing really on the tax front. What would you say are the big, missed opportunities?

Brendan Coates: Given the structural budget deficit, obviously, we can solve that partly, but while we spend spending restraint, but the government is being very optimistic about the degree of spending restraint, they’re going to receive in practice we’re going to need to see a combination of spending cuts and tax rises in order to close that structural deficit over time and tax reform is also really important because it’s a way of sort of accelerating what has been a pretty flagging rate of economic growth in Australia over the last decade. It’s one of the big tools that we actually or leavers we can pull to achieve higher living standards for Australians.

And so, look, given that we’re only a year away from an election, and we’re less than a year in the rearview mirror from an intergenerational report, it’s, it’s becoming really telling that neither the government or the opposition are really lining up anything in the way of tax reform in that what they’ve put out in this budget, we’ll have to see what the opposition does tonight in the budget reply speech.

But if we’re going to see, you know, tax reform, we’re going to need to see. Both sides of politics show basically how they would proceed or approach that if they’re going to form the next government, because it’s very hard to do that if you don’t generate some kind of mandate. When we think of tax reform, we’re thinking of both raising revenue and also improving economic growth.

And the way we can do that is through tax mix switches, which is basically we switch out one tax that’s got high economic costs for those that involve lower economic costs and like looking around at the options. Taxes on wealth, land and the exploitation of natural resources sort of become to the fore as things where you could do them.

They probably don’t involve the same degree of economic costs. They have sort of distributional consequences that are attractive given rising wealth inequality, and they do sort of reorient the intergenerational bargain, which is fraying. And so, the big one, the biggest hole is super tax breaks. So, they’re costing 45 billion a year.

It’s about 2 percent of GDP. They’ll pretty soon cost more than the age pension. They’re obviously not very well targeted. Half the benefits flow to the wealthiest one fifth of households. I put these in two buckets. There’s the bucket of things that you could probably take to an election at this point and be fairly confident it’s not going to hurt you too much.

And that is title limits on pretax contributions. It’s raising the tax rate on some of those pre-tax contributions through division 293 tax that would reduce the use of super as a tax minimization tool. And if you do those, there’s 3 or 4 billion dollars a year of sort of policies there that really trimming at the top end.

And then the elephant in the room is the fact that as soon as you hit age 60, you’re not going to pay any tax on your earnings. You basically had to check out of the tax system and that’s costing Australians billions of dollars or the government billions of dollars a year. And that’s not really sustainable in the long term.

But that’s obviously a much broader and more difficult reform because it hits right across the distribution, even if most of the gains or most of the extra costs at the top. We should be looking at the capital gains tax discounts. It is clear that discount has been too generous.

Historically, it does favour investments in speculation in property over potentially more useful capital investments, halving it, which is what we’ve previously proposed would raise about 5 billion. If it was combined with native gearing, that’s another 2 billion. And then other things Aruna that I think we should be looking for ahead of the election that would be great to see would be things like, you know, boosting taxes on the exploitation of natural resources. This is like a clear example of an area where the economic costs of those kinds of taxes are low, because we basically it’s the rate at which we’re charging capital investment or businesses for the right to exploit our natural resources.

You know, we could look at fuel tax credits that Grattan has previously recommended that would raise 4 billion and looking at trusts, which would raise about 2 billion. And so, there are a bunch of options on the table, but they’ve got to involve the government, you know, picking some losers. And that’s certainly not something that they’ve done in this budget.

Aruna Sathanapally: Alison, what do you think about tax opportunities on natural resources?

Alison Reeve: No, it’s definitely something that we’ve called for, and we’ve called on the states to do it as well, because, at the moment we don’t really, I think, make as much as we could out of, particularly the state-based royalties. Queensland did a good thing in its budget last year, where it raised the royalty on coal because coal prices were very high internationally, and it got a big windfall from that. So we need to make sure that we are getting a decent royalty stream out of the fossil fuel resources while we are still mining them, but then the best time to put in a good royalty regime around all of those other minerals is while they are still small industries, so that’s baked in from the beginning.

There really was a missed opportunity in this budget as well, which has been a missed opportunity for a long time to reform the petroleum resource rent tax. I did note in the budget papers that the amount of revenue that came from that was halved over the last year. There have been some reforms that have come before parliament, but they haven’t really gone as far as they could.

So that would be another one to throw into the tax reform basket. And given that particularly gas companies have made absolutely massive profits out of high in extraordinarily high international prices, I would’ve thought that one would be politically a pretty easy one to do if you were gonna take it to an election.

Aruna Sathanapally: So, I’ve got a great question that’s come up through the Q& A. How long do governments of either stripe have to make significant savings to the NDIS before public support starts to wane and requires something more drastic?

Sam Bennett: Yeah, well, sadly, we are seeing some of that. I think some of the commentary has been getting particularly inflammatory just in the last few months.

I’m on record as saying, I think the threats to the scheme at this point are existential. The issues that the bill I’ve been referring to was trying to fix have been urgent for several years. And every time we come around to the budget, things have got considerably worse. The issue is that it takes real political will, because it’s not easy to make the sorts of changes that are required to put this scheme on a more sustainable track.

It will mean further investment actually outside the scheme as I referred to so that some supports can be provided more cost effectively to people outside the scheme than they can inside it. As far as how much time we’ve got. I think probably at the next budget, if we’re not seeing really clear plans in there for foundational supports outside the scheme.

If we’re not seeing, a forward estimate that’s been significantly, increased again as a result of further upwards estimates in scheme costs. And I think there’s a major a major problem coming down the track. And for all of the things I talked about earlier as being potentially sort of a ways to make the scheme more efficient and effective.

I think at some point having a conversation about the extent to which the scheme being demand driven and uncapped rather than a proper conversation about, well, what’s the actual amount of GDP that we’re comfortable for the NDIS to cost. And that it only grows if the economy grows is the sort of conversation we probably need to be having because we’re already you know, aside from Scandinavian countries with a very different tax base pretty much at the top of the pile for that sort of projected GDP for the NDIS at this point in time.

Aruna Sathanapally: Yeah, look, and look, this is always the thing when you see an expenditure category that’s growing faster than the economy and then a tax category that’s growing slower than the economy, you know, you know, you’ve got something you’ve got to reckon with this sort of mismatch between how much we’re willing to pay.

And what it is we want as a society is something that at some point a brave government is going to have to tackle. And I for one certainly hope we’ll start seeing a little bit of that in the upcoming election. Speaking of brave, brave, big reforms, a question for Brendan on the housing side that’s come through is, do we need to be talking about more structural reform here rather than sort of symptomatic near term measures that don’t really deal with the percentage now of, of, you know, your average or median wage that you need to spend in order to buy a median home.

Brendan Coates: I think that’s a great question. And the issue here is that like sitting at the heart of this problem is the fact that we haven’t built enough. That’s why housing in part is so expensive. It’s not the only factor, but it’s certainly a factor that we have some control over. And if we shifted the dial on housing supply has a whole bunch of other really positive benefits for the economy.

So, you know, we want to see substantially more building the best way that we see to do that is to reform those planning rules that allow more housing to be built in the inner and middle ring suburbs of our major cities. You know, Australian cities, particularly, say, Melbourne and Sydney are some of the least dense cities of their size in the world, which means people are living far from jobs, and that has huge implications for everything from like economic dynamism, so how, how much people can create new businesses, they can find more new employment opportunities within, like what is the envelope in which they can reasonably commute from their home?

You know, it’s also adding to things like wealth and equality and sort of turning us back into that Pride and Prejudice society where the property your parents own is a bigger factor in sort of your life circumstances than what it was 20 years ago. I do want to give a plug to, I think it was a great question.

What should the coalition do tonight? Peter Dutton has appointed Andrew Bragg as he is shadow assistant minister for housing to sort of come up with some ideas. The one I would love to see is basically pushing the states to reform stamp duty. You know, if you’re wanting a reform, that’s going to basically, you know, make housing cheaper.

It’s going to boost home ownership. So, there’s some good work that’s been done that suggests, you know, a boost to home ownership of north of 5%. And it boosts Australia’s living standards by 20 billion dollars it was done nationally. That’s reforming stamp duty. The trouble is the feds, the states struggled to fund that transition off their own bat.

If the feds were willing to put in something for it to any state that was willing to make that transition, then that the federal government would be one of the biggest beneficiaries. Cause they collect four and five tax dollars in the country.

Aruna Sathanapally: it’s a really good point and it’s routinely at the top of the list in terms of things that economists would like to do to the Australian economy is to get rid of stamp duties and stamp duty on property being the leading one, but having, you know, having been in a state government myself, but that the cost is quite substantial.

State, state governments have done quite well out of stamp duties as the housing market’s been so strong and that money’s been used to support our health system, our schools, et cetera. It’s one of those wicked problems that exist in a federation where one, one level of government has the reform lever, and the other level of government raises far more money.

Follow up question for Alison around hydrogen, given Grattan’s recent work on hydrogen, and needing to dial down the hype, how do you feel about the green hydrogen positioning as part of Future Made in Australia?

Alison Reeve: I would actually have preferred to see more focus on green commodities and less focus on hydrogen because hydrogen is actually, no one wants hydrogen.

We want hydrogen as a fuel or as an input into other stuff that’s more useful, whether that’s, you know, whether that’s iron or aluminium or fertiliser or whatever it is. And I would have liked to see a little bit more focus on trying to get those green industries or greening up those industries.

Because then you would pull through the hydrogen development anyway. The other side of that hydrogen stuff is that it is all on the production side. It’s a production tax credit. No one’s going to produce stuff unless there’s a consumer to take it. And so, we actually are still really need something on the demand side to create the demand pool for people to do that. Because otherwise you just you have a chicken and egg situation. No one wants to invest. You know, people who want to use hydrogen need large quantities of it, and they need it to be cheap, but no one wants to invest in a plant to produce it at that scale, unless they know that there’s someone who’s going to take it. The tax credit is only pushing on one side of that problem. And we really do need things that pull on the other side to make that balance.

The government is being more sensible in terms of where they are seeing hydrogen being used. Part of the hype around hydrogen was people were seeing it as this magical fuel that could do anything and everything. And I think the government has very much moved away from that and said, no, this is a fuel that will have a particular niche where electricity is not the decarbonisation solution.

But having said that there’s still, it’s still very difficult to build an industry at the scale that we need to replace the fossil fuels just in that smaller subsector.

Aruna Sathanapally: And so, one more question has come in here that actually I’m going to, I’m going to answer.

So, the question was how, you know, to what extent the state’s growing debts and deficits impact on the fiscal policy of the Commonwealth in the long term. And it’s a really good question, right? Because the budget that came out on Tuesday, isn’t the only budget in town. Victoria’s budget came out last week.

New South Wales is putting out its budget next month, WA put out it’s a wonderful golden child budget quite recently. It’s one of the real tricky problems of Australian Federation. I’d say my main answer to that question, you know, to, to what extent does this play out as you see cost shifting?

As the Commonwealth faces more pressures on its budget as well, you see in the health system or in terms of disability supports, you see each government try and push the problem onto the other level of government. And so, you see you know, we, we’ve seen historically, the Commonwealth has tried to cut down its expenditure in primary care or in preventative care.

And leave the states to carry the consequences of that in terms of growth in hospitals. Or in the case of the NDIS, you see the conversation around what are some of those foundational supports that people will get in schools or other state-based settings. And as the states have less money to spend, they’re going to be less cooperative in, in, in those conversations.

And I think this comes back to the fact that Australian Federation wasn’t well designed on the tax side. We’ve got a deep vertical fiscal imbalance with responsibilities for services sitting with the states, downstream services sitting with states, but taxation power sitting overwhelmingly with the Commonwealth.

The states and the Commonwealth being able to come to the table productively on a lot of our biggest challenges is fairly critical and given that they’re at each other’s throats at the moment about GST, perhaps it’s going to be a bit of a bumpy road ahead. We’ve got a couple of questions here on, on JobSeeker that I might throw across to, to Brendan, because Grattan’s certainly had things to say about JobSeeker before.

What do you think the government should have done here or could have done here?

Brendan Coates: Look, it’s a really tough one, because I think it’s clear that we need the rise. So, JobSeeker for a long time has been well below the level that I think allows people to be empowered to go and find work as well as survive.

If they’re on that payment for a while, we’ve seen increases for originally from the Coalition and then in Labor last year. That mean that the payments gone up by 45 a week in real terms. Our position had always been it needed to rise by at least 100 a week. So, we’re still 55 dollars a week away from that. I could have imagined a world where we did more of that.

And perhaps we’re didn’t do something as big and untargeted as the energy rebate, which is 3.5 billion. Going to everyone, including everyone on this webinar, and I’m not sure that was the best use of very limited fiscal space. It really comes down to the fact that the energy rebates will suppress inflation over the short term.

Now, whether you think that has a big impact on interest rates or not is, you know another question but JobSeeker the money clearly would be spent. And so I think what we hope to see is the government, all the opposition pushing for a rise at some point soon while using, while making sure where they’re doing an environment where you have the fiscal space to manage that, because I think it’s really crucial to the lives of so many people, many of whom are older, many are women who are, you know, really struggling to survive on those payments.

Aruna Sathanapally: So, Allison, a bit of a tricky question here that’s come up. We haven’t really talked about the US Inflation Reduction Act or Europe’s Green Deal industrial plan. How do you see Future Made in Australia sort of shaping up in comparison to the sheer size and volume of what the US and the EU are doing.

Alison Reeve: It’s not the same size and that’s good. We don’t have the same physical capacity as the US or the EU. And if we tried to match them, we would just, you know, we would be spending an, we would make the NDIS look small, put it that way. The, the thing about, I think, where Australia needs to be clever with particularly with the US one is how we think about how we integrate with the US one.

So, the US one is stimulating. The US Inflation Reduction Act will be stimulating a lot of things like battery manufacturing, for example, that could be an advantage for Australia because it, you know, it creates a demand for minerals that we have. And so if we are focusing our efforts on building up that, then really we’re piggybacking and we’re getting a sort of double bang for buck with what we do, because we are, you know, using the sort of the pull of US demand and then creating the push from our end.

And so that would be, I think, a cleverer way to do it. One thing I have heard as well, is that for all that the tax credits in the U. S. are very generous on paper, accessing them has turned out to be quite difficult because the U. S. tax system is much more convoluted than ours. So, it’s going to be interesting just to see whether the fact that our tax system is a lot simpler and a lot easier for businesses to deal with, will actually end up being an advantage for us in terms of companies that are choosing between investing in the U. S. or investing here.

Aruna Sathanapally: I hadn’t thought about the tax point, but it’s a bit of a, you know, a tax tragic my favourite tax movie is Everything Everywhere All At Once, which centres on the complexity of the US tax system. We’ve only got a little bit of time left. So, I might just throw to Sam for like a minute for the very last question before wrapping up.

It’s a great question. At the outset of the NDIS, there was a really important you know, piece of thinking around how by supporting people through the scheme effectively you support them to, into employment and that’s part of how the scheme starts to pay for itself. Was this an erroneous assumption or do we think this is still something that the scheme can achieve?

Sam Bennett: Well, there are a lot of assumptions that went into the scheme at the beginning. Some of those have proved, I think, to be erroneous. And some of the projections in terms of the size of different participant populations is one of the most obvious ones there. But as it relates to employment absolutely right.

You know, that’s proved to be really intractable. We haven’t seen particular progress on that since the introduction of the NDIS, the sort of engagement in the labour market for people with disability in Australia really hasn’t shifted considerably over, over time. There’ve been probably some COVID related reasons for that for a short period of time.

But I think the major reason why it hasn’t is again, a design one in respect that the responsibility for disability employment is actually one that is not held predominantly by the NDIS but is actually fairly complex in terms of the different programs, including disability employment services, which the current budget has funding for the reform of because they really haven’t been doing their job particularly well, as well as the funding that the NDIS can put in plans to support people with their employment goals.

None of that is very well integrated. None of it is particularly clear in terms of accountability, and arguably the NDIS has the lowest direct ability to influence that metric over some of the other programs that exist. All it can do is put funding in somebody’s plan, that resulting in employment that is sort of maintained over a period is not really within the gift of the agency.

So, I really hope it can be done. But I think it will need some major redesign of the scheme for it to be realized, as with many of the other things I’ve talked about today.

Aruna Sathanapally: Unfortunately, we’re coming up on time. We won’t be able to answer all of the questions, but there is there’s a great one.

I want to at least leave with everyone online and that we’ll, you know, that is sort of central to why Grattan is here. You know, Alison made the point around not wanting policy to change around unnecessarily and the idea that what we want the opposition, what we want any opposition to do is to engage constructively on how to make things better rather than, you know, taking positions for the sheer sake of opposition.

And I think that the question was, what can we do to improve policy engagement rather than just simply taking yes, no positions. And how can we engage the broader public in that? That’s certainly something we at Grattan aim to do. We put forward you know, fact based, evidence-based policy solutions.

We’re always striving to do the work to figure out how to solve the problems, not just to point to their existence. I want to say a big thank you to Sam, to Alison and to Brendan for sharing your expertise with all of us today. If any of you would like to learn more about Grattan’s research, all of our work is freely available on our website at grattan.edu.au. We also have a podcast. So please subscribe. We have a newsletter on our website. And we’re on social media at Grattan Institute. Now we’re independent. We exist for the public interest, not vested interests. If you’d like to make a regular or one-off donation to Grattan, please go to grattan.edu.au/donate. Thank you everyone for joining me today and enjoy the rest of Budget week.