Budget switches focus from national security to domestic pain relief

Commonwealth Treasurer Josh Frydenberg and his Cabinet colleagues have squarely framed last night’s Federal Budget focus on addressing the rising cost of living pressures for all Australians.

Regardless of when or why the switch to focus on cost of living happened, it is, as the Treasurer said on national radio on Tuesday, the single most significant discussion point in most voters’ lounge rooms as we head toward a likely May federal election.

The massive defence and national security spending commitments associated with the previous khaki election focus, designed to distract from more troublesome domestic politics, still form a major component of the overall budget package – they have just been slightly camouflaged for the time being.

However, it is impossible to lose sight of the investment and export risks in our region when conducting any sustainable analysis of the budget and the context of the upcoming federal election.

The Chamber of Minerals & Energy (WA) provided a timely reminder earlier this week when it released an analysis of the performance of 56 Western Australian resources sector companies. It found the State’s mining, oil and gas, energy and contractor industries contributed a direct $100 billion to Australia’s economy in 2020-21 and directly provided more than 70,000 full-time jobs, representing $12.67 billion in wages and salaries.

The CME data showed the direct contribution by the 56 member companies to the WA economy alone was more than $61 billion. More than $10.98 billion was contributed in payment to the State Government, while in the context of the federal budget, more than $24.21 billion made its way into Commonwealth accounts.

While the Federal Government has been more forward than usual in acknowledging Western Australia’s contribution as the nation’s economic engine room, particularly during the COVID years, what the Coalition don’t want to talk about is the fact they have presided over the worst diplomatic relations with our major customer in living memory.

It is ultimately an untenable state of affairs when senior ministers and bureaucrats in our country can’t secure a meeting with their Chinese counterparts for even mutually amenable discussions, let alone pick up the phone in case something contentious arises between the two nations.

That’s not to say that a Labor Federal Government would necessarily do any better; it’s simply a statement of concern that requires urgent attention.

While the macro supply and demand fundamentals remain sound for Australian exports, and commercial circumstances are particularly favourable at the moment, there is little evidence to suggest any prevailing goodwill toward Australia if that were to shift.

If you needed a reminder of China’s long-term strategic objectives and willingness to exploit its influence to Australia’s detriment, it came loud and clear this week via our near neighbour the Solomon Islands in the form of the Naval Base Security Draft Agreement between the two countries.

Back to more domestic concerns, Australia’s unemployment rate is the lowest it has been in almost half a century – thanks in part to net migration into the country being down over the past two years, resulting in a reappraisal of local workers for roles that may well have been filled with international alternatives.

The issue with household spending capacity generally is that inflation moved another 1.3 per cent in the last quarter of 2021, delivering an annualised jump of 3.5 per cent, with wage growth indicators lagging at 2.3 per cent despite the tight labour market.

It’s this market tension that most economic commentators believe will ultimately stimulate the invisible hand of equilibrium to grow wages in due course, but that will be of little interest to families who have seen a bad situation exacerbated since Russia invaded Ukraine and both petrol and diesel prices responded in furious fashion.

Major infrastructure investments are the other headline act in the just-released budget, with a significant focus on defence, transport, manufacturing and value adding more of our raw commodities in Australia prior to export.

Of course, value adding ultimately means downstream processing, as most Western Australians in particular would understand.

The problem on the horizon with that strategy of course is most ore refining, including battery chemicals plants, industrial manufacturing processes for chemicals and even fertilisers, rely on gas as a feedstock for that processing to occur.

And, while the Federal Government went hard in the first stages of Australia’s economic return from COVID lock downs with “a gas-led recovery”, it has become highly unfashionable to talk about gas – mainly due to the inevitable counterpoint around the importance of transitioning electricity generation away from fossil fuels to renewable generation sources.

The argument around the role gas can play in supporting renewable generation growth aside, it’s important to note that in the Western Australian context just 40 per cent of gas is used for power generation, with the remainder going to downstream processing operations.

We need to separate these two arguments and do it quickly.

There was little that was new in the budget in terms of major energy investments, other than $84 million to deploy microgrids, which builds on $170 million of existing funding since 2019 that is expected to support more than 60 projects.

However, the budget papers did include a statement that the Government will “…also look to secure our future gas supply by supporting key projects identified in the National Gas Infrastructure Plan”.

It also recognised that “…increasing supply of affordable gas will help alleviate cost of living pressures for households and businesses and protect Australia from potential energy shortages”.

A WA Gas Market Development Report by specialist energy consultant Wood Mackenzie, commissioned by the Domestic Gas Alliance, predicted a gas shortfall 2024-2027 before overall demand began to decline in the next decade in line with net zero targets from state and federal governments.

This is the first time in almost a decade we have faced this issue – but it means we need to ensure domestic gas policy helps relieve any supply shortages, not worsen them.

This demand can only be met if sources of supply already in the project development pipeline are ultimately approved and final investment decision taken, as we have seen recently with WA’s offshore Scarborough Field.

Budget 2022-23: By the Numbers

The bottom line

• According to the Budget papers, since the Mid-Year Economic and Fiscal Outlook, the estimated underlying cash balance has improved by $103.6B over the five years to 2025‑26
• Deficit is expected to halve to 6 per cent of GDP by 2025‑26
• The deficit for 2021-22 remains at $79.8B, falling to $43.1B over the forward estimates to 2025-26

Cost of living

• Automatic income tax-exempt payment of $250 to an estimated six million people at a cost of $1.5B made to all eligible pensioners, welfare recipients, veterans and eligible concession card holders in April 2022
• Fuel excise halved for six months, which should see petrol and diesel prices drop by 1c/litre
• Home Guarantee Scheme expanded to more than double available places to 50,000 per year
• New Regional Home Guarantee to be established and available places under the Family Home Guarantee supporting single parents to double
• More than 10M individuals eligible for a one-off $420 cost of living tax offset from 1 July
• Together with the low and middle income tax offset for 2021‑22, new offset will provide around $12B in support from 1 July 2022

Transport infrastructure

• Additional $17.9B committed to infrastructure projects to improve connections between regions and major metropolitan centres and encourage business investment and growth, supporting around 40,000 jobs
• Local Roads and Community Infrastructure Program extended until 2024‑25, providing $500M for local councils to maintain and deliver priority projects
• $3.1B for the Melbourne Intermodal Terminals, to take trucks off the road and deliver freight efficiencies
• $2.7B for Faster Rail projects from Brisbane to the Sunshine Coast and Brisbane to the Gold Coast
• $2.3B for South Australia’s North-South Corridor
• Western Australia’s $2.3B in project funding includes $441M for METRONET, $400M for the Outback Way – Western Australia and $73M for local road and community infrastructure projects

Regional investment  

• More than $21B to unlock opportunities in regional Australia
• $2B for a Regional Accelerator Program to create jobs in the modern manufacturing, critical minerals and agriculture sectors
• $7.1B in infrastructure to help access new areas for commodities production growth, including funding for four regions of national importance – the Northern Territory, North and Central Queensland, the Pilbara and the Hunter (NSW)
• Additional $2B to Northern Australia Infrastructure Facility, bringing total funding to $7B
• $480M to upgrade NBN Fixed Wireless and Satellite networks
• $811M for Connecting Regional Australia initiative to expand mobile coverage and resilience to natural disasters

Health

• $6B for COVID‑19 response and preparations for new variants
• Additional $150.3M to support medical training in rural and regional Australia
• More Commonwealth-supported places in rural and regional medical schools
• Increased access to regional MRI machines through extended Medicare rebates
• New university departments of Rural Health
• More than $55B over four years to support aeromedical outreach services, including $33.3M to the Royal Flying Doctors Service, $18M to CareFlight and $4.1M to Little Wings
• Pharmaceutical Benefits Scheme Safety Net thresholds reduced from 1 July, benefiting some 4M Australians
• $2.4B over four years to PBS to reduce out‑of‑pocket costs for managing conditions including cystic fibrosis, spinal muscular atrophy and bowel cancer

Education & skills

• Annual funding for schools increased from $13.7B in 2014 to $25.3B in 2022
• Additional $225M allocated to improve educational outcomes, particularly for disadvantaged students – including ongoing commitment for all preschool age children to access at least 15 hours/week of quality learning
• 20 per cent bonus deduction for eligible external training courses for the private sector through to 30 June 2024, providing $550M in tax relief
• Further $2.8B for a new streamlined Australian Apprenticeships Incentive System, including:
• up to $9,000 in wage subsidies over two years for eligible employers
• $5,000 in Apprentice Training Support Payments for apprentices ($1,250 every six months for two years)

National security

• Defence funding as a share of our economy to exceed two per cent in 2022‑23, from less than 1.6 per cent in 2012‑13
• $9.9B investment in Australia’s intelligence and cyber capabilities
• $575B to be invested in the Defence Force over the decade to 2029-30, with $270B of that to go to defence capability, including:
  • At least $38B to boost Defence workforce by 18,500 personnel by 2040
  • $10B-plus for future naval infrastructure, including a new east coast submarine base
  • $3.5B for up to 75 new M1A2 Abrams tanks and other armoured vehicles

Disaster relief and resilience

• $7.4B allocated for new and expanded dam projects to increase water security and build drought resilience, including:
• $6.6B for water infrastructure in Qld to facilitate development of a new food bowl
• $139M to make water delivery in the Murray‑Darling Basin more reliable and more sustainable
• More than $6B expected to be spent on disaster relief and recovery as a result of flooding in NSW and Qld, including:
• $2.2B to households for income support, temporary accommodation and social services
• $665M to businesses and farmers for repairs, new equipment and support services
• $589M for community clean-up and recovery, including $300M from the Emergency Response Fund for recovery and post-disaster resilience initiatives