The 2023 budget is a goldilocks option, treading a fine line between too hot and too cool.
If the budget stokes the fire of inflation then the RBA will be compelled to raise rates again. They may clip 4% and send the inflation spiral shooting upward. If the budget has got the balance right, the income of vulnerable people will increase while inflation pressures are tempered.
The stakes are so high they might as well be planted in the moon.
The question on everyone’s lips is, has he done it? Has Jim Chalmers delivered a cost of living focused budget that doesn’t awaken the inflation troll?
The glistening centrepiece of the 2023 budget is a $14.6B cost of living package.
Of the five biggest expenditures, the government has allocated:
- $5.6B to strengthen Medicare and increase bulk billing.
- $4.6B for increasing JobSeeker and welfare.
- $2.7B for rent assistance.
- $1.9B for single parents.
- $1.5B for energy price relief.
Boosting JobSeeker and related payments by $20 per week (and slightly more for most Australians on it aged 55 and over) comes at a cost of $1.3 billion per year, far less than the $5.7B his economic inclusion committee recommended. Youth allowance will go up by the same amount, $20 a week or $2.86 per day. It is cost of living done cheap. The government has also tripled the financial reward for doctors who bulk bill, which means more clinics should start bulk billing. By eliminating the current ‘gap,’ the government ensures more patients don’t incur out of pocket costs.
Paying less for healthcare is, you guessed it, counter-inflationary!
It is also an interesting political shift. The Albanese government has boosted the welfare budget rather than raid it, finding spare funds through cuts to construction projects. It is rewriting the rules for a more compassionate Australia while keeping things contained.
All of these measures are aimed at the poorest Australians, which is consistent with Albanese’s view that inflation is a “tax on the poor.”
However, rather than a cash handout, these measures are primarily subsidies. It isn’t just spending money that you can splash at JB-Hi-Fi. They are targeted at specialised uses, mainly to purchase bare survival necessities. It has come at the expense of previous budget winners in big industries and construction. The budget quietly euthanised $873 million worth of agricultural and damming projects.
Pouring concrete is out, and low-income support is in.
The announced spending increases make it cheaper to purchase medicine, rent and pay your energy bills. Any budgetary beard-stroker would tell you that lowering the price of things is counter-inflationary, to the note of a 0.75% drop according to Treasury estimates.
Being counter-inflationary is the name of the game in 2023.
Chalmers’ budget makes a very deliberate decision to hold back. It isn’t a fun budget or an exciting one. It is big R Responsible. He has chosen to bank 80% of the windfall gains, hoping to slash net interest bills over time.
Alongside this is the biggest budget saving in the document, which Chalmers didn’t mention in his speech. It’s a $74 billion windfall – huge in anyone’s language and dwarfing any of Labor’s other deficit reduction strategies.
What is it?
Curbing the growth of the NDIS. The government has committed to bringing down the current ‘unsustainable’ growth rate of 13.8% to 8%, providing the bulk of the savings. The NDIS is also set to be restructured. Bill Shorten’s new NDIS will be tougher on compliance, set on fighting rorts, and prevent over-servicing or overcharging. It won’t be shrinking or kicking people out. Instead, the government is turning it into a robust and efficient machine with a structural place in our economy.
Managing expenses is a necessary and prudent decision.
Reducing the amount we owe later gives us a little bit more breathing room when it comes time to have the talk. The inevitable tax talk. The government faces an enormous structural deficit over the next decade. Stage 3 tax cuts worth $254B over ten years, ballooning costs, and a grossly inadequate rent resource tax means the deficit will continue to grow.
These are pressing and important matters that need to be addressed if we want to keep the things that make Australia great. Our universal access to healthcare, our strong welfare support, and our government investments in future infrastructure.
But there is room for improvement.
The budget does hide some skeletons in the closet.
For example, the decision to increase the fuel tax credit to $9.4B in 2023-23 and the failure to increase the petroleum rent resource tax by enough. How does a commodities superpower earn more from a tobacco excise than from a tax on oil? You know, the industry worth $164B.
Also absent is talk of necessary structural change to housing. The government and the opposition pay lip service to renters, but neither party is proposing the changes that would make a difference long into the future.
When coal prices return to a third of their current value next year, and the large company tax receipts dry up, we will be left with a pretty scary situation. We have got in the habit of spending more than we earn. It is not all sunshine and rainbows.
So it is wise that the government is holding back. We need time to reckon with the much more extensive changes required as we move forward, which should concern us more than a temporary bout of high inflation.
Another problem is that the budget almost guarantees an increase in the unemployment rate and a fall in consumption.
We can look to Okun’s rule to model how unemployment reacts to GDP growth.
It states that to maintain a constant unemployment rate, the change in real GDP must equal the growth rate in the labour force plus the change in labour productivity. As a long-term trend, productivity growth sits at around 1.5%. So given that the labour force is expected to grow at 2% and then 1.7% for the next two years after 2022-23, then GDP must be 3.5% for the current year and 3.2% in the following.
If you look at the GDP growth predictions, we are so far from those figures.
So unless labour productivity falls or GDP estimates miraculously understate the reality, unemployment could soar above the 4.5% rate the treasury has predicted.
The budget brings some significant changes to light. It delivers genuine cost-of-living support for low-income earners and offers modest spending where we need it. The essentials and the survival necessities are accounted for. It also reins in the fastest-growing areas of spending, the NDIS and our interest repayments.
But despite the good work, and against Chalmer’s best expectations, the budget doesn’t sizzle. It is being overshadowed by the $254 billion cost of the stage 3 tax cuts over the next decade, worth about 17 times that of the total cost of living package.
I like Annabel Crabb’s analogy, where she says to picture that “Suit Guy is hesitating over a 50 for the Big Issue vendor, while simultaneously giving 5 billion times as much to a guy driving past in a Maserati.”
It’s a bit of a shame because the budget does make some good choices. It gives low-income earners that bit of extra support when they need it most and on a broader level, that benefits everyone.
If I were to give the budget a catchphrase, it would be ‘cost of living done cheaply.’ We will have to wait and see whether it has done too much or too little. Are we in the Goldilocks zone?