The striking feature of the 2023-24 budget delivered by Treasurer Jim Chalmers is how it managed to balance what are often conflicting priorities of fairness in taxation, a good amount of productive government spending, social policy reforms, fiscal responsibility, and a medium-term strategy to restore the government’s finances to good health.
In other words, the economics and politics of the changes and reforms in the budget have been thought through and look to be effective.
Given the economic and political climate prevailing, it is difficult to find any significant areas where the budget could have done much more.
The tax changes are well-targeted, yet moderate. Spending decisions were a mix of restoring fairness and decency, boosting productivity, and - in aggregate - they will further dampen inflation.
One of the big-picture highlights of the budget, which Chalmers is actually quite coy about, is the big-picture strategy of budget repair.
A surplus of good news
If the Treasury forecasts are right, there will be a budget surplus of $4.2 billion in 2022-23, a great result built on unexpectedly high commodity prices that delivered a truck load of company-tax revenue to the government. This was added to by a surprisingly low unemployment with strong incomes growth, which saw income tax payments come in stronger than expected and some government spending lower.
This change in the budget balance, based on these trends, has parlayed into the next three financial years where the budget deficits that were forecast by the previous Coalition government have been slashed by a total of more than $60 billion. This is a dramatic change in the government’s financial position and a trajectory that must be sustained for several more years if government debt is to be contained and then to fall.
It also means that the horrendous $1.2 trillion projection for government debt in June 2026, which Liberal treasurer Josh Frydenberg delivered in his last budget in March 2022, has been scaled back to $1.0 trillion. That’s a quite astonishing $200 billion downward revision to government debt over the next three years.
This is important for many reasons, not least because it reduces the government’s interest payments in the recent climate of rising interest rates. It also means the government is rebuilding government finances when the economy is on an even keel, getting ready for the next crisis, whenever and whatever that may be.
Three cheers for budget repair.
What about the economy?
The budget has been framed around a broad, near-term economic slowdown.
According to Treasury forecasts, GDP growth is expected to slow from 3.7 per cent in 2021-22, to 3.25 per cent in 2022-23, 1.5 per cent in 2023-24, before picking up to 2.25 per cent in 2024-25. A soft landing for the economy beckons on this outlook.
This economic backdrop has prompted Treasury to forecast the unemployment rate to rise to 4.5 per cent in 2024-25 which is around the rate of unemployment consistent with full employment.
The inflation forecast in the budget showed a welcome drop over the next two years. Early market reaction to the budget showed no concern in the slightest about any inflation risks. Bond markets and the Australian dollar were little changed.
The budget measures will cut 0.5 percentage points from inflation. This has meant that Treasury is forecasting a more rapid deceleration in inflation than the recent RBA forecasts – with inflation falling to 3.25 per cent by June 2024 and 2.75 per cent in 2025.
It is all but impossible on this outlook that the RBA will hike again and, indeed, if inflation falls more rapidly, the market pricing for interest rate cuts will be correct.
Could we have a second surplus?
There is hope that the 2022-23 budget surplus will not be a one-off. The current forecast budget deficit for 2023-24 is just $13.9 billion - or 0.5 per cent of GDP. Small beer in budget terms.
If commodity prices remain above the budget projection, and the government implements some discretionary tightening in spending and tax policies over the next 12 months, a further budget surplus can be delivered this time next year. A less rapid slowdown in GDP growth would also assist to deliver a surplus.
Let’s hope this comes to pass.
It will be a good thing to see the budget surplus sustained, government debt starting to fall and government finances back to good health. It is a long march to repair the budget but this is an important step along that path.