Australia markets open in 8 hours 14 minutes
  • ALL ORDS

    7,259.50
    +9.20 (+0.13%)
     
  • AUD/USD

    0.6990
    +0.0077 (+1.11%)
     
  • ASX 200

    7,020.60
    +5.00 (+0.07%)
     
  • OIL

    90.29
    +1.28 (+1.44%)
     
  • GOLD

    1,805.90
    +14.70 (+0.82%)
     
  • BTC-AUD

    34,283.77
    +1,077.52 (+3.24%)
     
  • CMC Crypto 200

    558.59
    +15.71 (+2.89%)
     

Budget 2022: Morrison Government on track to be ‘highest taxing’ in history

·4-min read
Treasurer Josh Frydenberg during Question Time in the House of Representatives, where he will deliver the 2022 Budget.
A tight Budget from Josh Frydenberg would dampen inflationary pressures and reduce the deficit. (Source: Getty)

Treasurer Josh Frydenberg will deliver his fourth budget next week. It will outline the Morrison Government’s policy and economic strategy for 2022-23 and beyond.

With the economy going through a once-in-a generation inflationary surge, responsible economic management would see a strategy for the budget that takes some of the heat out of the economy.

Also by Stephen Koukoulas:

In other words, it is important that fiscal policy is slightly restrictive - to use the economic jargon - which means tweaks to lower the growth in government spending, and adjustments to ensure revenue growth is enhanced.

Such a strategy is simple to understand.

There will be less government stimulus at a time when the private sector is strong and, with the added benefits of lower budget deficits in the next couple of years - and if things are well implemented - a budget surplus in three to five years.

Any extra spending, which may be necessary in health, aged care, disability services and education, should be delivered in full, but economic prudence demands this is broadly offset by savings or revenue elsewhere.

This will help ensure there is no extra inflationary stimulus that would force the RBA to hike interest rates even more aggressively than the financial markets are already pricing in.

And for the record, from the current cash rate of 0.1 per cent, the futures market is already pricing in a cash rate of around 1.25 per cent by the end of 2022, and 2.5 per cent by the end of 2023.

That important issue of the cyclical influence of fiscal policy on growth and inflation aside, there is no doubt there will be an improvement in the bottom-line deficit numbers thanks to booming tax receipts from high inflation, better-than-expected levels of employment and unemployment, and record-high commodity prices.

It might even see the Morrison Government overtake the Howard government as the highest-taxing government in Australia’s history.

These fortuitous tax flows would be best saved by the Government and used to lock in a lower budget deficit.

How to manage a budget

It is strikingly obvious that at times when the economy is weak and vulnerable, good fiscal policy sees the government ramp up its spending, lower its tax take and register budget deficits.

This was evident in the success of policy during the global financial crisis and the more recent coronavirus recession.

Generally, good fiscal policy was set in place.

The opposite of that is essential when the economy is strong, inflation is running rampant and there is over-full employment.

This is where the Australian economy is right now and, as a result, a tighter budget and a return to surplus is desirable.

Two sides of policy, working arm in arm

To be sure, the GFC and coronavirus shocks saw both monetary and fiscal policy working to achieve the same goal – economic support, higher spending, lower taxes and aggressively lower interest rates.

Right now, there is intense pressure on the RBA to hike interest rates to contain inflation, which is set to test a 30-year high.

If Frydenberg’s Budget next week can tighten fiscal policy in concert with an inevitable interest-rate-hiking cycle, the extent of interest rate increase will be materially reduced, and there will be the added benefit of repairing the budget, which has been left in tatters from the coronavirus.

If, as may be the case given the extensive pre-budget leaks about extra spending on a cost-of-living bonus and potential cuts in excise taxes, the Government will be adding fuel to the inflation bubble.

A board showing high fuel prices and a man filling up his car.
There have been calls for a cut to the fuel excise in the Budget (Source: Getty)

This will put extra pressure on the RBA to hike even more to get inflation sustainably in its target of 2 to 3 per cent.

What is needed right now is, in total, economic policy tightening to ensure inflation is contained.

If there is a series of policy settings that pump money into the economy, it will ensure even higher interest rates than would otherwise be the case.

If the Treasurer can bank the windfall of revenue from the strong economy, he will be helping the RBA - at the margin - to contain inflation and slow the surge in government debt.

It is clear what a sound, responsible budget will look like. Let’s hope we see it.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting