Labor has produced a responsible Budget that balances the need to advance traditional Labor priorities while also bringing inflation down. But there remains more to do.
As was telegraphed weeks in advance, this Budget had two primary objectives. First, to help bring down inflation. Second, the Government wanted to provide support for living standards, targeted at those who are most in need.
But there is a tension between these two objectives: how to support living standards and restore public services without adding to inflation. Thus, as the Treasurer keeps emphasising, the Government is doing what it can to pursue a Labor agenda given the budget constraints.
The Labor Agenda
Key new spending measures in this Budget include:
- A 15% pay rise for aged care workers to attract the increased staffing necessary to ensure quality aged care services (cost $11.3bn).
- Tripling the incentive to bulk bill around 11.6 million pensioners, health care card holders and children, and thus help lower their cost of living (cost $3.5bn over 5 years).
- Strengthening Medicare by moving from a primary care system based on fee for service to a funding system based on patient needs that will also encourage teams of health practitioners to work together.
- Updating and extending the medications available on the pharmaceutical benefits scheme (cost $2.2 bn over 5 years).
- An increase in JobSeeker payments of $40 per fortnight to around 1.1 million Australians looking for work, studying or doing apprenticeships (cost $4.9bn over 5 years) and a much bigger increase for those aged 55-59
- Expanding parenting payments to cover single parents until their youngest child turns 14 rather than 8 (cost $1.9bn over 5 years).
- A 15% increase in rent assistance (cost $2.7bn over 5 years).
- Energy bill relief of up to $500 for more than 5 million low-income households and small businesses ($3bn)
- A new Hydrogen Headstart program (cost $2bn) to assist in the production and export of hydrogen power.
- Another $4 bn to realise our future as a renewable energy superpower, bringing the total government investment to $40bn.
- Major funding for the development of businesses taking advantage of Australia’s comparative advantage in the production of green-based hydrogen, as well as further support for the development and use of renewable energy.
- Investing $3.7bn in a revamped skills agreement with the States, including 300,000 fee-free TAFE places for critical and emerging sectors.
- Restoring the funding of national institutions ($535 million).
What is outstanding about these new expenditures is that they very much reflect a traditional Labor agenda. It is hard to imagine the Coalition introducing any of these policy changes, even if they do now support some of them. Indeed, many of the additional expenditures reflect the need to increase funding after years of Coalition neglect, or even deliberate underfunding, such as for health, welfare, the environment, renewable energy and the national institutions.
To my mind Labor supporters and others on “the Left” should be pleased with this Budget. It represents a major turnaround compared to a continuation of the Coalition Government. Interestingly, the initial response by the Coalition to the Budget has been to criticise the amount of additional spending and argue that the Budget does not do enough to bring inflation down, although they won’t say where they would make savings.
I understand that many Labor sympathisers would have preferred greater ambition, a point that will be addressed further below. But as the Treasurer has emphasised, it is also important to recognise the budgetary and inflationary constraints that the Government is facing – a subject to which we now turn.
Bringing down inflation
According to the Treasury, “inflation has peaked and begun to moderate.” “While still elevated, inflation is expected to fall to 3¼ per cent in 2023–24 and return to the target band [2-3 per cent] in 2024–25.”
Monetary policy has been at the forefront of anti-inflation policy, with the Reserve Bank’s cash rate rising over the last twelve months from 0.1% to the present 3.85%. Of course, the forecast return to a surplus of $4.2 billion in the current financial year will also help complement the monetary tightening to bring down inflation.
In addition, global price shocks and supply constraints have eased, and the Government’s measures to deliver cost-of-living relief are expected to reduce inflation by ¾ of a percentage point in 2023-24.
At the same time, the Government has been at pains to persuade us that it has now produced two tight budgets and hasn’t gone on a spending spree. The proof being, according to the Treasurer, that in its first two budgets the Government has in total returned 87 per cent of the extra revenue windfall that has largely come from lower unemployment, stronger jobs and wages growth, and higher prices for key exports.
Also, the Albanese Government’s two budgets represent a more disciplined approach to expenditure control in response to a surge in revenue than in the past. For example, the Howard Government increased total real government expenditure at an average annual rate of 6.6 per cent between 1999-00 and 2007-08, whereas total real expenditure over the next four financial years is projected to increase at a significantly lower average annual rate of 3.9 per cent.
But for both governments their revenue windfalls were largely good luck, reflecting what are called parameter variations, and were not the result of government decisions. Instead, the best test of this Labor Government as responsible fiscal managers are the policy decisions it has made to vary taxation and expenditures.
As shown in Table 1 below (based upon official data), 0ver the four years from 2022-23 to 2025-26, the net increase in revenue from policy decisions by the present government is a bit less than half the extra expenditure from its policy decisions. And policy-induced additional spending in the forthcoming 2023-24 financial year will be more than three times as much as the additional revenue from policy decisions.
So, without the parameter variations affecting both revenue and expenditure, which essentially reflect revisions to the forecasting assumptions, the budget deficit in 2023-24 would have increased by $54.7bn. That is equivalent to an increase in the forecast underlying budget deficit from 0.5% of GDP to 2% of GDP, or alternatively expenditure would have been that much less.
Furthermore, even after these parameter revisions, the Budget will still have a structural deficit of more than 1 per cent of GDP as far ahead as can be reasonably projected. Prudent fiscal policy will almost certainly require that this deficit is addressed, and a balanced budget restored, and sooner rather than later.
But so far so good. The initial reaction of financial markets was to give this budget a tick. The day after the budget interest rates had not moved. We now wait upon the Reserve Bank, but I think that this budget is sufficiently responsible and close to fiscal neutrality that we can reasonably expect that the Reserve Bank will not increase interest rates any further.
Conclusion
Budgets are the best summary of a government’s priorities. What this Budget tells us is that yes we have a Labor government, but it is a cautious Labor Government.
That caution was also demonstrated by the Hawke Government when it was first elected. However, the Hawke Government came to see that it had to accept the challenge of improving Australia’s economic performance and that meant changing the public debate.
Today the Albanese Government is facing a different challenge. We cannot have the services and the sort of caring society that most Australians want, without a deliberate change in policies to raise more revenue. But this will not happen until the Albanese Government leads a new public debate on why governments need more revenue.
Clearly there are still areas of unmet need; most prominently the inadequate income support for unemployed people and the availability of affordable housing. On the other hand, there remain some very obvious ways to increase the revenue needed to pay for these additional expenditures, such as amending the Stage 3 tax cuts and getting a better return from the petroleum resource rent tax (PRRT).
There is media speculation that the Albanese Government will revisit these issues as part of broader tax reform in the lead up to the next election. But postponing these very obvious changes in taxation in this Budget only makes them more difficult to achieve later on, given that small changes to the PRRT have recently been agreed and people will have received their Stage 3 tax cuts if we wait another year.
In sum, this Budget is competent and does advance a Labor agenda, but it also could have been more ambitious and thus represents a missed opportunity.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
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