Yahoo Finance Budget deficit: How the treasurer can nudge it towards a surplus
A super overhaul and abolishing the stage 3 tax cuts would be a good start for the treasurer in his quest to deliver a surplus.
The federal budget is 10 weeks away and Treasurer Jim Chalmers has a Herculean task of meeting the needs of the economy and the Australian people.
The demands on government finance have never been greater, and looking after government finances has been made all the more challenging by the incredible increase in interest costs on the government’s debt.
Mortgagees aren’t the only ones feeling the squeeze from higher interest rates.
Also by the Kouk:
At one level, however, the economics is remarkably simple.
With high inflation, there should be an array of spending cuts and tax increases to take some of the heat out of the economy. A decent fiscal policy tightening would take considerable pressure off the RBA to further hike interest rates and, done well, it could add a much-needed dose of fairness to the task of pushing inflation lower. In other words, not just slugging mortgage holders with the task of getting inflation back to the target band.
A fiscal tightening would also do wonders for repairing the budget, left in tatters by the previous Coalition government, with a legacy of government debt on track to exceed $1 trillion and budget deficits every year over the next decade.
Come the budget in May, a meaningful array of spending cuts and tax measures could see a return to surplus within a couple of years.
Policy vs politics vs promises
Politically, it is a different story. No one likes the service they receive cut or to pay more tax, even if such measures add to fairness in the tax system. When it comes to budget repair, where to cut and what tax measures to implement are the $64 billion questions.
As we are seeing with the Coalition reaction to what should be a non-controversial proposal to take away tax breaks for superannuants with a balance of more than $3 million - which will raise about $1 billion per annum - finding a total $10 billion-$20 billion per annum in fiscal repair will be no easy task.
Or is it?
Those with an interest in the long-term good management of the budget will have an array of ideas for such budget repair. Tackling the costly and unfair superannuation concessions is one such area. Taking away subsidies from part of the highly profitable business sector is another.
Abolishing or, at least, delivering a substantial overhaul to the stage 3 income tax cuts is another area that - in economic policy terms - is low-hanging fruit, worth around $250 billion over the next decade. But Labor gave a commitment during the 2022 election campaign to keep those tax cuts – politics trumping policy again, it would seem.
And while such policies are clearly sound, the noisy opposition from vested interests and political opponents to any such changes is where the implementation difficulties come in. Any other cuts in government spending will no doubt spark manufactured outrage from those impacted.
Surplus of ideas to get rid of budget deficit
It is a policy priority to responsibly move the budget back to surplus as soon as is sensible and prudent, given the outlook for the economy.
If Chalmers can do it and fight off the bleating of vested interests and the stonewalling from the opposition, think of the politics for Labor at the next election.
At the 2025 election - where, no doubt, the economy and economic management will be the key issue for many voters – Prime Minister Anthony Albanese and Treasurer Jim Chalmers will be able to tell the electorate how, with tough decisions, the Labor government returned the budget to surplus, and how it had started down the track of reducing government debt.
Voters like that.
The government could also take some of the credit for what is likely to be an easing in interest rates through part of 2024 and possibly into 2025.
It sounds like a plan.
The political fractures that often work against good economic policy may yet again intervene to lead to a suboptimal outcome. For the sake of the economy over the medium term, let’s hope not.
A tight budget in May, which takes the budget towards a surplus, adds to fairness and equity, and puts genuine downward pressure on interest rates is a win, win, win strategy.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.
