There’s more to this budget than it appears - Grattan Institute

Treasurer Jim Chalmers is doing everything he can to portray next week’s budget as an unexciting affair. It will be “bread and butter” or “solid”, he regularly tells us. After a brief flirtation with tinkering with the stage three tax cuts that would have made for some serious frisson, the budget will primarily be a vehicle for delivering on election commitments.

But that doesn’t necessarily mean it will be boring. Indeed, the budget will give us an important sense of where fiscal and economic policy will be going for next three years.

First, we will get to see the government’s most up-to-date take on the macroeconomic environment and the consequences for the bottom line. Frankly, it’s a highly unusual period. In the short-term, things are surprisingly rosy on the fiscal front. High commodity prices (especially relative to Treasury’s deliberately conservative assumptions) and low unemployment wiped almost $50 billion off the forecast deficit for 2021-22 and should substantially reduce it for this financial year.

But the “dark storm clouds” the Treasurer is fond of referring to are real. The latest IMF World Economic Outlook downgraded the growth outlook for the US and China and forecast that parts of Europe will dip into recession in 2023. These challenging global conditions will inevitability drag on Australia’s economic performance.

How Treasury reads the balance of risks for the bottom line will be crucial in how far the government feels it can move on its “nice to haves” – the policies it strongly believes in but where cost is the major constraint.

The government has already bitten the bullet on expanding paid parental leave to 26 weeks, albeit with a go-slow on the rollout to delay the full fiscal cost. But there are several others, including bolstering support for low-income renters and single parents, that are close to the heart of the Prime Minister and many of his colleagues, that probably hang off the numbers.

The government’s $15 billion National Reconstruction Fund must not become the next big pork barrel.

Danielle wood

The second point of interest will be how much emphasis the Treasurer puts on the medium-term budget challenges. He has previously emphasised the growing fiscal cost from higher interest rates and growing spending on the NDIS, aged care, defence and health. Indeed, the March budget projected spending would stabilise at 26.5 per cent of GDP in the medium term (compared to an average of 25 per cent before COVID). The government has implied this number may now be higher.

Discussion of the medium-term outlook normally sits unobtrusively in the middle of Budget Paper Number 1. The more it is elevated in the narrative – receiving focus in the Treasurer’s speech or the Budget Overview – the clearer it will be that the government is tilling the ground for genuinely difficult decisions in next May’s budget, assuming economic conditions hold up. Those stage three income tax cuts are not yet out of the firing line.

Also of significance will be how aggressively the finance minister has wielded the scalpel on “rorts and waste”. Closing the door on heavily pork-barrelled programs such as the Community Development Grants is a no-brainer. And much of the previous government’s $21 billion package of regional infrastructure and development projects – the eye-watering price tag for the Nationals’ net zero commitment – is surely also low-hanging fruit.

But a commitment to genuinely tackle these problems would include better processes for determining future grants. This means a decision to step away from funding community infrastructure – which was never the purview of the Commonwealth government.

It would also mean a commitment to keep ministers out of grant selection processes. This is especially true of the government’s $15 billion National Reconstruction Fund, which must not become the next big pork barrel.

There is also huge scope for avoiding future waste in restoring better decision-making in funding of major infrastructure projects. The new Infrastructure Minister has been making the right noises about the need to listen to Infrastructure Australia and to get the politics out of funding decisions.

But that is hard to square with the government’s commitment of $2.2 billion to Victoria’s Suburban Rail Loop – a massive project with question marks over its costings. Proceeding with this commitment in the budget before Infrastructure Australia has had a chance to assess the business case casts early and significant shade on the Albanese government’s claims of superior fiscal accountability.

So even while the Treasurer talks down its significance, next Tuesday’s budget should still reveal a lot about the new government’s approach to the nation’s finances. How much room will the government have to deliver its “nice to haves”? How far will it go in tackling the structural budget problem in 2023? And is it genuinely committed to closing the door on the rorts and waste?

The answers should all be there for those who dig below the “bread and butter” headlines.

Danielle Wood

Chief Executive Officer
Danielle Wood is CEO of the Grattan Institute where she heads a team of leading policy thinkers, researching and advocating policy to improve the lives of Australians. Danielle also leads Grattan’s Budgets and Government Program.

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Danielle Wood – CEO