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Get set for a tough budget in October

·4-min read
Composite image of budget ministers Katy Gallagher and Jim Chalmers, and Australian note money.
Jim Chalmers and Katy Gallagher have some hard decisions to make ahead of the October Budget. (Source: Getty)

One of the most striking issues for the new Albanese Government was when Treasury confirmed, to incoming Treasurer Jim Chalmers, the budget disaster left behind by the Morrison government.

Treasury made it clear that even if the economy were to sail through the next decade with no economic hard landing, and if the unemployment rate was to hold at 5 per cent or less, every year through to the early 2030s was set to register a huge budget deficit.

Also by the Kouk:

There was no expectation from Treasury that the budget deficit would fall on current policy settings, such was the train wreck of spending and taxing policies from the previous Coalition government.

Even more disconcerting was the previous government’s underestimation of the cost of a range of critical issues – disability support, the cost of health care and Defence, to name a few.

More accurate projections for the cost of these items made the budget deficits over the next year even higher, as the Treasurer soon discovered.

This budget position fed into projections for both net and gross government debt exploding beyond $1 trillion if nothing was done to start repairing this unwelcome and unsustainable position.

Budget surplus a pipe dream

Chalmers and new Finance Minister Katy Gallagher have been working furiously to look for policy changes that will start the extraordinarily difficult task to repair the budget.

A budget surplus is currently a pipe dream.

There are a few relatively easy savings – some of the rorts that were in the budget can be eliminated and some tightening in tax collections from large multinational firms are reasonably straightforward.

But, in total, they will only help the bottom line of the budget by a few billion dollars.

Former Australian prime minister Scott Morrison (r) and former treasurer Josh Frydenberg hold a news conference.
The previous government left a 'train wreck' of spending and taxing policies. (Source: Reuters)

It is not easy to find overall savings of $50 billion a year or so, which is required just to get the budget roughly to balance.

It’s a task that will take more than just the Budget on October 25 to achieve.

Trimming $50 billion out of the economy each year will require tax and spending reforms that some people will not like and are likely to be vocal about. Politically difficult is an understatement.

The good news about budget repair is that it is best to do it when the unemployment rate is low, not high; when economic growth is solid, not weak; and, even more importantly, when inflation is high, not low.

Politically, giving the electorate some tough policy medicine just after an election is better than just before the next one.

All of which means the economic circumstances and political cycle are close to perfect for serious, hard-hitting budget policy reforms.

The economy is currently at over-full employment and, as we all know, inflation is very high.

Fiscal policy tightening is needed in any event but, if you are to act to repair the budget, current circumstances are about as good as they can get.

Taking pressure off the RBA?

If the Budget was to trim the budget deficit by withdrawing money from the economy with spending cuts and tax adjustments, it would be welcome at the Reserve Bank (RBA), which is fighting hard to slow the economy to get inflation tracking back towards its target.

Indeed, it would take some pressure off the RBA to lift interest rates to the near 4 per cent currently being priced into money markets.

It is likely Chalmers and Gallagher will highlight this when they embark on selling their ‘tough’ Budget in late October and into November.

It will be a message along the lines:

“We have taken the tough decisions in the Budget on spending and tax, not only to start the process of repairing the budget and reducing the budget deficit, but we are also taking pressure off inflation, which will assist the RBA in reaching its target.”

The next election is still two-and-a-half years away.

If, by then, the Government can point to a material lowering of budget deficits, a lower trajectory for government debt and, at the same time, see inflation back under control - which is the essential ingredient to boost real wages - it will be confident in selling its economic-management credentials to the electorate.

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