Jim Chalmers is a wily operator. Ahead of delivering his first budgetnext Tuesday, he has given himself room to do the things a treasurer needs to do.

For a while, his predecessor Josh Frydenberg denied himself that room. In his first budget as treasurer under Scott Morrison ahead of the 2019 election, Frydenberg promised to get the budget back in the black.

That 2019 budget forecast increasing surpluses as far as the eye could see (which wasten years, the limit of the graphs presented in the budget papers). The Liberal Party began selling back in the black celebratory mugs at A$35 each.

The trick was that from then on, government spending would grow more slowly than the rest of the economy. As a proportion of GDP, it would slide from around 25% to23.6%by 2029-30.

For that to happen, all sorts of government programs would have to become and stay less ambitious for ten years. But instead of details, Frydenbergs department gave usgobbledegook such as that lower payment projections had been

driven by lower than expected payments across a range of programs in the forward estimates flowing through to the medium term.

It made substantial extra spending near-impossible.

The 2019 budget assumed that the cost of National Disability Insurance Scheme couldnt blow out (it has), that governments couldnt spend more in response to aged care and disability royal commissions (theyll have to), or pay aged care workers the big rises the Fair Work Commission is about to award, and so on.

COVID changed everything except the tax cap

Just about every fairly foreseeable crisis couldnt be responded to, if the assumptions in the 2019 budget were to be believed.

Not even by raising more tax. A separate tax cap set out in the budget said the government would never collect more than anarbitrarily chosen23.9% of GDP.

Frydenberg tied his own hands in a way a treasurer who wanted to take charge of the nations finances would not have.

Until COVID. Within a year, Frydenberg junked the back in the black pledge and spent big, because he had to.

But he kept in place the bizarre 23.9% tax cap. The Liberal Partycampaignedon it in the election, challenging Chalmers to adopt it.

No tax cap but what comes next?

But heres how much Chalmers really wanted the job of treasurer. In an election in which Labor repeatedly presented itself as a small target, Chalmers said no to the tax cap, over and over again.

Asked onABCs 7.30last month whether next weeks and future budgets would be bound by the tax cap written into Frydenbergs final budget, he said the cap had been more or less plucked out of the air.

And I had the courage, if I can say that, to say that before the election as well as during the election campaign.

His task was to fit the budget to the conditions Australia faced: rising inflation, falling real wages, rising interest rates, and looming recessions worldwide.

The amount he would have to spend, and the amount he would have to raise, would be the result of those deliberations.

And it would be the result of things beyond any governments control. Unexpectedly, the Coalition almost breached its tax cap in itsfinal year in officebecause of a flood of revenue flowing from higher commodity prices and a greater than expected number of Australians in jobs. It took in 23.4% of GDP.

What would it have done if it had breached the cap? Given the money back?

Growing demands on the budget

The demands on future budgets will be enormous. Not only paying for the National Disability Insurance Scheme and aged care, but also Medicare, hospitals, defence, education, rent assistance, boosting thescandalously lowrate of JobSeeker, and dealing with increasingly frequent floods and climate change.

Australians expect these challenges to be taken seriously.

Labors actual election promises arent that expensive. The parliamentary budget office found a net impact of$6.9 billionover four years.

In Tuesdays budget, Chalmers will find much of the money for those promises by cancelling decisions made in Frydenbergs March budget. An upside of having budgets in both March and October this year is that a lot of the money committed in March hasnt yet been spent.

How do we pay for what we need most?

But beyond that, Chalmers says he is up for aserious conversationabout how we pay for the services we need and have a right to expect.

A former head of the prime ministers department, Michael Keating, wants anexpert committee(not a royal commission made up of lawyers) to prepare a bottom-up estimate of the extra revenue we will need to guarantee the essential services we are likely to need.

After the committee has developed the estimate, Keating wants a second inquiry to work out how best to raise it.

Economist Ross Garnaut told Septembersjobs summitthat as a share of GDP, total federal, state and local government tax revenue was 5.7 percentage points below the developed country average.

On one calculation, that means Australia could raise an extraA$140 billiona year and_still_be taxed at developed country rates. It neednt all come from income tax. Most developed countries have much bigger goods and services taxes than we do, and many have windfall profits taxes, and effective taxes on energy exporters.

And it neednt all be raised now. Theres no point in taxing more for the sake of taxing more. But we are likely to need to raise more in future, to help fix the kinds of problems were likely to face in the future.

Thats the overdue conversation we have to have, starting next Tuesday.

Peter Martin is Business and Economy Editor of The Conversation and a Visiting Fellow at the Crawford School of Public Policy at the Australian National University.

A former Commonwealth Treasury official, he has worked as Economics Correspondent for the ABC and as Economics Editor of The Age.

First Published in THE CONVERSATION Oct 18, 2022