- Deficit what deficit?
The rise in commodity prices as a result of the Russia-Ukraine war and the COVID-19 ravaged world economy has helped the Budget’s bottom line. As a result, revenue has been boosted and the deficit is likely to halve over the next five years. Economically, this is good news but politically Jim Chalmers can’t blame the Morrison Government for a “deficit blow out” as Bob Hawke and Paul Keating could Malcolm Fraser and John Howard (and John Howard in turn did to his Labor predecessors). Eventually you need to stop bagging your predecessors and start governing, but when and how you do this is an important political skill.
- Put away the 'debt truck'
Politicians go into a frenzy at Budget time, talking about the “trillion dollar debt” and standing next to silly props like 'debt trucks'. But gross debt is likely to be a quarter of national income not a third, so it's actually very manageable. Net debt is half that. And with export prices booming we can easily pay the interest. This is nothing compared to the debt bill Liz Truss has handed to Rishi Sunak in the UK.
- Talking about inflation
Inflation was a threat last election, now it is reality. Of course, it also helps with Budget revenue and pushes punters into higher tax brackets. Hence the Budget will attempt to provide some relief to households especially with higher energy costs (similar to the petrol excise relief granted last Budget by Josh Frydenburg).
- Tax cuts, where art thou?
There’s been fierce debate about preserving the Stage 3 tax cuts for those earning over $200,000. Economists like Chris Richardson argue that the top 10 per cent of income earners will still pay 45.1 per cent of our total tax burden, just over the 44.9 per cent they pay now, but agrees the tax cuts are expensive. But the Federal Government doesn’t want to get into the same position as the UK, where Liz Truss offered generous tax cuts to the wealthy (although hers were totally unfunded). And there’s a question about how inflation pushes a number of taxpayers into the top rate at the margin. This is a decision that Jim Chalmers doesn’t have to make today, but it will be important in the medium term for the government.
- Putting the green back in the green and gold
Australia continues to be affected by floods just two years after experiencing horrendous bushfires. Together with the pandemic, Australia has experienced a ‘trifecta of tragedy’. Fortunately, and ironically given their relationship to climate change, commodity exports are helping us to pay for flood relief. The Federal Government is keen to help renewable industries to help ‘put the green in the green and gold’ in future. However, like the Hawke-Keating Government with manufacturing tariffs, the Albanese Government wants to manage the transition carefully, especially given the importance of commodities to our trade relations with Asia and the rest of the world.
- A grainy picture
The Russia-Ukraine War has boosted prices for commodities that both Australia and Russia export, like oil and natural gas, and that Ukraine and Australia export, like wheat. Australia exports wheat, barley and other grains to China, South Japan, The Philippines, Vietnam and now even to Egypt, Yemen and Nigeria. Twenty to 50 years from now, Australian school children will learn about how Australian farmers helped to feed the world during the economic downturn triggered by the Russia-Ukraine War.
- Helping Working Mums and Dads
A centrepiece of Labor’s Budget is the 26-week parental leave scheme, extending the original scheme championed by Tony Abbott. It’s about fairness and the capacity for new dads to take leave as well as new mothers, but it is also geared towards productivity. It’s a question of costings and the capacity of employers and employees to take it up.
- Social progress but not at any price
There will be funding for important social programs in early childcare, disability, education and training. However, while these programs speak to social justice, they also help boost workforce participation and productivity.
Above all, what's important about the Budget is not about whether the country is in deficit or surplus, but that it holds true to the social contract. The Budget raises taxes from workers and businesses to pay for the young, the old, the sick and the disadvantaged. And it reflects the social values of the nation as well as the economic strategy of the government of the day.
Tim Harcourt is Industry Professor and Chief Economist at the Institute for Public Policy and Governance (IPPG) and the author and host of The Airport Economist www.theairporteconomist.com