The Albanese Governments economic management has been very competent, but unfortunately also marked by a lack of ambition in tackling the challenges facing Australia.

Halfway through the Albanese Governments first term in office and at the end of the calendar year it is timely to review the Governments economic management.

Fiscal policy

The key economic priority has been to bring inflation down. While much of the responsibility for fighting inflation has rested with monetary policy run by the Reserve Bank, the Governments budget policy has necessarily been supportive.

The other budget priorities have been to:

• implement the Government’s election promises,
• provide targeted assistance to the households most affected by the cost-of-living crisis,
• repair the budget while also repairing some of the service deterioration caused by the previous governments underfunding of essential services, such as health and education, and
• start investing in the foundations of future economic growth.

In the last election Labors small target strategy meant that its election promises were inevitably limited, and they have now been largely implemented as promised. However, extra spending to alleviate the cost-of-living crisis and to repair public services has been constrained by the need for tight budgets so as to not add to inflationary pressures.

Overall, the sum of all the Governments policy decisions, since it came to office, have increased budget payments in the current financial year by 2.2 per cent. This increase would, however, have been higher if not for the Government finding offsetting savings in spending programs of $49.6 billion since the election. Furthermore, since the Albanese Government was elected, the average annual real spending growth projected out to 2026-27 is less than 1 per cent, which the Treasurer has said is around five times lower than the average of the previous Government.

Similarly, the Government has used 88 per cent of the very substantial revenue upgrades since the 2022 election to improve the budget balance. By comparison, according to the Treasurer, the previous Government banked only 40 per cent of any revenue windfalls.

The net result is that last financial year there was a small budget surplus the first for 15 years and this year the budget will be in balance. This improvement in the Budget balance also means that government debt will be less than projected under the previous Government, with a consequent saving of $145 billion in interest costs over the 12 years to 2033-34.

The Economy

When the Albanese Government was elected, inflation was already rapidly increasing, with an increase in the consumer price index (CPI) of 6.1 per cent over the twelve months ending in June 2022.

The Reserve Bank responded and started to increase interest rates on the eve of the election. However, monetary policy always takes effect with a delay, and not surprisingly, inflation continued to increase for another six months, with the CPI increase peaking at 7.8 per cent in the year ending in December 2022.

But now inflation is starting to come down, with the latest data showing the CPI increasing by 5.3 per cent over the twelve months ending in the recent September quarter. It will be another year before inflation is expected to be back in the target range of 2-3 per cent; nevertheless, it is questionable whether further interest rate increases will be necessary and hopefully interest rates will start falling later next year.

While most of the burden of fighting inflation has appropriately been borne by monetary policy, the Labor Governments fiscal policy has been supportive.

Australian economic growth was solid at 3.1 per cent in 2022-23. Understandably, however, it is expected to moderate to around 1 per cent this financial year in response to the higher interest rates and a global economic slowdown. Next year, 2024-25, economic growth is expected to pick up as inflation subsides and household incomes improve.

At present the labour market is also slowly loosening, with hours worked down 0.1 per cent in November and the total number of hours worked is now around where it was back in May. Nevertheless, the labour market remains remarkably resilient. Unemployment at 3.9 per cent is still below 4 per cent, the participation rate is at a record high of 67.2 per cent, and more than 620,000 jobs have been created in the eighteen months since this Government came to office.

In sum, remarkably for the first time it looks likely that high inflation will be brought back under control without a recession. Furthermore, it would not have been possible to bring this inflation down so quickly and without a recession without that fiscal support. Thus, at least so far the fight against inflation has succeeded without much damage to economic growth and the labour market.

The cost-of-living crisis

The principal criticism of the Governments economic management has been the cost-of-living crisis.

Most households living standards are principally determined by their wages, and the present cost-of-living crisis mainly reflects the failure of wages to increase as fast as prices over the last three financial years. In addition, for around one third of households, their mortgage payments have increased since Labor was elected by an average of around $400 per week because of the rise in interest rates.

The Government has responded by providing limited financial support for the most needy households through energy bill relief, childcare, reduced prescription costs for medicines, additional incentives for doctors to bulk bill, and rent assistance.

In total this assistance is officially estimated to have already reduced inflation by a percentage point over the year to September and is expected to reduce inflation by of a percentage point in the June quarter of 2o24. However, the extent of this Government financial support has of course been limited by the need for tight fiscal restraint.

Furthermore, if wages start to increase faster than prices before inflation is brought back down to an acceptable rate, that would risk much higher inflation for longer, and in that case higher interest rates as well. Instead, the Government has limited its support to an increase in the minimum wage and also wage increases for some low-paid workers in the care industries.

Anyway, we now appear to be weathering the cost-of-living storm. Wage growth has started to pick up, and the Treasurer thinks that after two consecutive quarters of positive real wage growth, annual real wage growth is expected to return in early 2024. The Treasury is then forecasting real wage growth of per cent in 2024-25 and a return to a more normal 1 per cent growth rate in the following two years.

But real wages fell by 7per cent between 2019-20 and 2022-23, and that forecast rate of future real wage growth means that real wages will still be 5 per cent below their previous peak in 2026-27. Furthermore, the only sustainable way of restoring real wages faster would be to increase the rate of growth in productivity.

In the medium-term Treasury is forecasting that productivity will increase at an annual rate of 1 per cent. This is about the same as the annual average rate of productivity growth in the decade before Covid, but it does raise the question whether the Government could be doing more to accelerate Australias future productivity and economic growth.

Economic reform and future productivity growth Overall, the Government can rightly claim to have been a responsible economic manager. Most economists would give the government a big tick for its tight fiscal discipline. The high inflation that the Albanese Government inherited is coming down, and this has been achieved without a recession and while still maintaining low rates of unemployment.

The most common criticism of the Government by economists not the Opposition which has no policies is that the Governments reform agenda is insufficiently ambitious.

In response, the Treasurer has pointed to:

• the investment of around $3 billion to advance Australias plan to become a renewable energy superpower, including investment in critical minerals projects;
• up to $12.6 billion for a National Skills Agreement and the recently announced reforms of the migration program in favour of more skills.

The Government is also undertaking a Competition Review over two years as the Government considers that greater competition is critical for lifting dynamism, productivity, wages growth, putting downward pressure on prices and delivering more choices for Australian consumers.

But fundamentally the Governments reform agenda will always remain constrained while it refuses to make significant changes to the tax system to raise more revenue.

Notwithstanding the Governments best intentions and some extra funding, many essential services are likely to remain under-funded, including:

• aged and child care, especially if wages need to increase to attract the necessary staff,
• social housing, where the present goal is to fund 40,000 new social and affordable homes over five years, but where the unmet need is estimated to exceed 600,000 units,
• hospitals where performance standards are not being met, at least partly because of inadequate funding,
• primary health care where measures have been taken to strengthen Medicare, but there would be faster progress with additional funding, while the size of the present gap payment risks the accessibility of medical services,
• schools where Australia has more inequality than almost all other OECD countries and resource standards are not being met,
• tertiary education where funding per student has fallen and is not projected to increase, while the funding for research is similarly low, thus risking Australias future rate of innovation,
• action to reduce carbon emissions, especially investment in transmission lines,
• income support for unemployed persons and additional rent assistance,
• expenditure on defence, diplomacy and foreign aid to adequately respond to the deterioration in international security.

In sum, the most important reform needed is reform of the tax system with the specific aim not of reducing taxation, but rather to raise more revenue roughly equivalent to 4 per cent of GDP. The starting point would be to reshape the Stage 3 tax cuts, so that they were much more evenly distributed and probably saving several billion dollars.

Unfortunately, the Albanese Government has not only resisted any change to the Stage 3 tax cuts, but more generally it has failed to start the necessary debate about why Australia needs more tax revenue if it is to realise its future economic potential and be an inclusive society.