Treasurer Jim Chalmers and Finance Minister Katy Gallagher have delivered a budget as extraordinary as it is ordinary.
The budget recasts our fiscal strategy and repairs our national accounts without any of the bells and whistles that would have made it popular, like a cash handout. It is hinged on the promise of responsible spending and no waste, and that is exactly what we need. It provides measured cost of living relief while also addressing some of the structural problems which have plagued our economy for decades.
While the budget certainly delivers the right commitments, it does not go far enough. Absent from the budget conversation are price controls, windfall taxes on oil and gas, and reforms to personal tax. After all, would higher taxes not have the same effect as rising interest rates in combating inflation?
But despite its shortcomings, this is a budget for unprecedented times that sets new parameters for the Australian economy. Its commitments seem ordinary, with the delivery of Labour’s election promises and a pared-down agenda of projects. Yet the ordinariness of this year’s commitments is extraordinary because of its promise; to inject our country with new productive capacity and tame the worst inflation in 3 decades.
This raises an important question, what can budgets actually do to curb inflation?
The standard route is contractionary fiscal policy, which means spending cuts, increases in taxes, and a greater commitment to servicing government deficits. This follows the logic that lower debt means smaller interest repayments, greater financial stability, and less money circulating in the system to raise prices. One downside to this is that hard spending cuts often trigger a beatdown from markets, driving the economy into recession.
The less conventional path is improving the economy’s productive capacity through investment, rather than stifling demand with spending cuts and austerity. This path of economic growth mirrors some of our policy moves in 2008. Currently our economy is overheated; with demand for goods and services outstripping the supply. By lifting the fundamental supply side aspects of the economy we close this gap.
Jim Chalmers is attempting a mix of both. The government is charting a contractionary path while attempting to build a stronger foundation, walking the fine line between austerity and abundance.
In an attempt to strengthen productivity, spending is directed at the economy’s weak sectors. In 2022 these are skills shortages, low migration, and women’s participation in the workforce. The government has formally budgeted its election promise to increase childcare subsidies for families earning less than $530,000 a year. This policy comes at an ongoing cost of $1.7 billion annually, but is delivers a robust and immediate return on investment. Additional childcare subsidies will allow more stay-at-home parents to return to the workforce, resulting in the equivalent of 37,000 full time workers being available. This helps reinforce Australia’s supply side capabilities and is an important investment.
The higher childcare subsidies exist alongside a commitment to increase paid parental leave to 26 weeks by July 2026, at an ongoing cost of $620 million a year. The government also plans to spend roughly $2 million on supporting education and compliance of anti harassment measures to make women feel safer in workplaces. This will inevitably increase Australia’s productive capacity, as we retain a larger share of female professionals in the workforce after they have children, and decrease the financial burden. Bringing women back into the workforce is paired with increasing the migration cap to 195,000 (costing nearly $1 billion) to provide a stable and sizeable workforce capable of meeting Australia’s growing demand.
Another structural reform is addressing skills shortages. The government has budgeted $922 million over 5 years from this financial year on to support vocational education. Much of this funding goes towards providing 480,000 free TAFE places, with 180,000 becoming available next year alone. This is the centrepiece of the government’s plan to eliminate skills shortages that drain the energy from our economy. With more skilled labour, it is the government’s hope that production increases.
Bringing the discussion back to inflation control, boosting our nation’s ability to provide goods and services prevents those large output gaps which push prices up from developing. Even when demand surges or pressure mounts, the economy will have the foundations and structures to cope with it and deliver.
This is a frugal approach to fiscal policy.
Labor has paid for many of its election promises by hacking into coalition programs and spending promised in the March budget but which hasn’t gone ahead yet. It plans to spend only $9.8 billion of the $52.5 billion in windfall gains from high commodity prices and a stronger than expected economy. The national wallet has also been aided by the soaring cost of living and low unemployment, which raise tax revenue through both PAYG tax and GST. This has halved our forecast deficit, with the government now expecting $36.9 billion instead of the Coalition’s $78 billion.
It is clear that the government has built an inflation-ready budget which attempts to address the structural failings of our economy.
But the 2022-2023 budget seems to accept higher cost of living as normal while failing to address some of its most insidious causes. Most notably there is no attempt to curb business profiteering in the current cost of living crunch. Modelling by the Australia institute suggests that profit growth accounted for a stunning 60% of economy wide price increases.
Why do we accept that big business profits are at record highs of almost $80 billion for the first half of the 2022 financial year alone?
The oil and gas giants – Shell, Chevron and BP – have all reported record profits when some Australians struggle to pay their electricity bills. The Treasury predicts energy prices will rise by 20% by Christmas and 30% in the next financial year. We should not accept that price gouging is standard business procedure. Competition policy that limits the extent of inflated margins could make everyday costs more manageable and help tame inflation – I wouldn’t usually suggest this but the fact the inflated margins are contributing to exacerbating inflation makes it a direct solution to the problem. Another solution would be to extract more tax from gas companies, who pay peanuts and are largely behind the increase in energy costs. We are the largest exporter of gas in the world yet receive almost nothing for it.
The reluctance to offend oil and gas companies, as well as bigger businesses, comes at the detriment of the community and the economy. Any anger percolating around the budget for what it fails to do is completely warranted, but that shouldn’t overshadow the good things it sets out to achieve.
So while the government is pursuing abundance and austerity with great skill, there is more to be desired.