The commentary on Tuesday night’s budget has landed on a tone of cynical resignation.
Yes, the government is pumping billions of dollars of stimulus into a strong economy. Yes, it’s committing tens of billions of dollars in new infrastructure spending with not so much as a business case. But what can you expect in an election year? Given Labor will simply rubber stamp it, shouldn’t we be grateful that the budget wasn’t more reckless?
The “could have been worse” consensus is rooted in the extraordinary budget numbers.
Government tax receipts this year are 4.5 per cent higher than anticipated just four months ago. This is part dividend from the strong labour market recovery, rightly trumpeted by the government, and part awkward benefit from the invasion-fuelled commodities price boom.
The government is spending “only” $17 billion of the extra $38 billion windfall next financial year, and about one quarter of the $143 billion windfall over five years. Hence, the “relatively restrained” refrain.
But putting aside cynical political takes, how does the budget measure up as an economic document? And what might be the short- and long-term economic consequences of the measures the budget has unleashed?
First the short term. The budget forecasts paint a picture of a strong economy over the next two years. Unemployment falling to 50-year lows of 3.75 per cent within months. Consumer spending a buoyant 5.75 per cent and business investment reaching 9 per cent next financial year.
Right conditions for major stimulus?
Rare for the past three decades, the challenge is inflation, with the consumer price index expected to hit 4.25 per cent this year before dropping back to 3 per cent next financial year.
Now ask yourself – does this sound like the right economic conditions for the rollout of a major stimulus package?
The government will spend $13.4 billion, or 1.3 per cent of gross domestic product, on a supercharged tax offset (worth up to $1500 per person) and $250 cost of living payments to welfare recipients over the next six months.
To put it in perspective, that is bigger than the Rudd government’s first fiscal stimulus package for households during the global financial crisis. That’s before you even get to the 22.1c a litre reduction in the fuel excise for six months, worth another $3 billion.
Even when you consider the very real challenges for households from some of the transitory price increases for petrol and food, first principles economics would suggest a more targeted package would be in order.
And what about the longer term? While most of the budget coverage has focused on the cost-of-living package, the tens of billions of additional taxpayer dollars flowing to infrastructure deserve a more forensic look.
Infrastructure pipeline is already huge
The government has trumpeted $17.9 billion in new transport infrastructure spending.
Most of the projects are not on the Infrastructure Australia priority list and many do not yet have a business case. The quality of the spend is uncertain, and the likelihood of cost overruns is heightened because projects have been announced before proper scoping. But, more fundamentally, where is the economic rationale for more transport spending right now?
The pipeline of road and rail projects around the country is already huge. State governments managing these projects have highlighted the challenges of shortages of raw materials, machinery and labour, even indicating that some projects may need to be delayed as a consequence.
Adding more non-urgent projects to this pipeline makes very little sense.
And this proposed activity sits alongside another construction-heavy regional development package that includes $7.1 billion in “transformative infrastructure projects” focused on the Hunter, north Queensland, Darwin and the Pilbara, $7 billion for new and expanded dam projects and $2 billion for a “regional accelerator program”.
The budget papers make it very difficult to identify what is new, but it is clearly a big grab bag of projects with a huge bill attached. And while some of these may have merit, with limited opportunity for scrutiny or proper analysis, the potential waste is enormous.
All of this matters because the good times won’t continue forever.
The budget is in structural deficit and is forecast to remain so over at least the next decade. Australia has come out of the COVID crisis with government spending substantially higher as a share of the economy than when we went in. Higher spending on aged care, defence and the NDIS is already baked in, and there are further significant needs on the horizon, not the least of which is better pay for aged-care workers.
How to pay for it? That’s a discussion this budget conveniently skirts around. But whatever the electoral reality, the medium-term challenges are real. That’s why committing to spend tens of billions of taxpayer dollars with little in the way of economic justification really rankles.
So, yes, it could have been worse, but I can’t help thinking that it could also have been a lot better.
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