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OPINION: The tough job of budget repair and the path to surplus

·4-min read
Finance Minister Katy Gallagher and Treasurer Jim Chalmers during a budget press conference.
Katy Gallagher and Jim Chalmers have some tough budget decisions to make. (Source: Getty)

Treasurer Jim Chalmers and Finance Minister Katy Gallagher have inherited a budget position from hell.

The Morrison government was economically reckless. It locked in high spending and unaffordable tax cuts that delivered huge and neverending budget deficits and a rising level of government debt for years to come.

Also by the Kouk:

The budget outlook was so misguided that, for the next decade, the Government is forecast to borrow money to pay the interest on its soon-to-be $1.2 trillion of debt.

This was not - and is not - sustainable in any way.

With interest rates rising in concert with the explosion of government debt, if nothing is done soon, the Government will be spending more in interest than it spends on schools.

The budget facts:

In simple terms, the Pre-Election Fiscal Outlook (PEFO) document from April 2022 showed that, on the policy settings of the prior Coalition government, the budget deficits would be:

  • 2022-23 - $78 billion

  • 2023-24 - $57 billion

  • 2024-25 - $47 billion

  • 2025-26 - $43 billion

That’s around $225 billion of deficits in just four years. Four years where the economy was expected to grow at a solid pace, with low unemployment and rising wages.

Indeed, the budget was expected to remain in deficit around these levels right through to the early 2030s.

These projections were behind the expected surge in gross government debt to around $1.2 trillion, which is just under half of Australia’s annual economic output.

It is the highest level of government debt in peace times.

And these numbers are based on the assumption of ongoing solid economic growth for a decade. Any upset to the economy would worsen these already-parlous budget numbers.

It is a real problem and the dilemma is how to repair this budget mess.

Josh Frydenberg, David Littleproud and Scott Morrison during a press conference.
Josh Frydenberg (l) and Scott Morrison (r) left Labor with the highest level of government debt in peace times. (Source: Getty)

The new Labor Government will ramp up the process of repair in its first budget on October 25.

While there are few details yet on the measures Chalmers and Gallagher will take to lower the budget deficits - and, with that, cap the rise in government debt - some tightening in tax collections and trimming unproductive government spending are an obvious start.

Budget gains must be 'banked'

The Government should also allow any benefits from a stronger economy to flow through to the budget bottom line. It does appear the economy is broadly stronger than assumed at the time of PEFO.

Unlike the Morrison government - which had a huge windfall budget gain from an unexpected boom in commodity prices and a welcome fall in the unemployment rate - Chalmers and Gallagher must ‘bank’ any unexpected budget gains to raise the prospect of delivering a surplus within five years.

This is the first rule of budget repair.

That said, a return to budget surplus will be a major policy challenge. It will be a tough thing to achieve and is unlikely to be registered within the next five years.

It will rely on prudent spending and taxing, some good luck from the international economy and broader macroeconomic reforms that will boost productivity, which in turn will help repair the budget bottom line.

With annual government spending and taxing around $550 billion-$600 billion over the next few years, finding a net $50 billion improvement in the budget bottom line will require a range of difficult decisions.

By definition, government spending cuts mean someone in the community, however unworthy, will no longer receive government funding.

Those groups are usually noisy and work hard to undermine the decision.

Tax changes or increases are - obviously - taking some money from bank accounts which, again, is not a popular issue for those involved.

In theory, the task of budget repair is easy. In practice, it is tough.

Economists can easily point to taxing and spending that can - and should - be changed to repair the Budget, but the political practicalities suggest most of these moves are unpopular.

This is where the sales job of Chalmers and Gallagher will be so important.

Sometimes, the best prudent economic policy means taking money out of the economy. We are in one of these stages now, including with the RBA interest rate hikes that are unfolding.

The Government must do this as it implements its reforms and starts the challenging job of fixing the Budget.

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