Inflation, future growth influence Chalmers’ first Budget

It’s been just seven months between Commonwealth Budgets, with the Albanese Government releasing their first set of books yesterday. The last Budget of the Morrison Government was delivered in March, but a lot has certainly changed since then.

The March Budget had a pre-election feel about it with plenty of spending measures and few cuts.

The October Budget is a stark contradiction, with Treasurer Jim Chalmers setting expectations with phrases such as “workman-like” and a “bread and butter” in the lead up to its release.

It’s the kind of Budget the fictitious Treasury team of late 2000s comedy The Hollowmen would gleefully describe as ‘almost boring’.

Upon election in May, the Albanese Government immediately drew attention to the Budget situation they inherited.

It’s New Government 101 to blame the previous mob for anything uncomfortable but they had a point in this regard. The economy was already softening at the time of the election, while pre-election promises had boosted spending.

Fast forward to yesterday’s Budget Speech from Dr Chalmers, and he admirably resisted the temptation to blame the Morrison Government or harp on about legacy issues.

Besides a few thinly veiled references to “the previous 10 years” and the odd “lost decade” swipe, he got on with the task at hand and focused on what his government would do.

Key to his message was that this Budget has been influenced by inflation, the economic downturn playing out globally, and international evidence of what happens when governments borrow too heavily.

Spending has been reined in in most areas, although significant spending increases will be needed in key areas such as the NDIS (National Disability Insurance Scheme) (a 12% increase in spending per year over the next four years), health (6.1%), aged care (5.1%) and defence (4.4%).

It is certainly a Budget of its time, but it is also potentially a Budget of its timing.

Given the next one is just around the corner, the Commonwealth could just be treading the Budget water before making a big splash in May.

Budget Assumptions

Deficit

Commodity prices continue to provide the Commonwealth with improvements to the nation’s Budget deficit, with a strong labour market also playing a role. The October Budget’s forecast underlying cash deficit for 2022-23 is just under $37 billion — less than half the $78 billion forecast back in March.

Unfortunately, this is a temporary improvement, with deficits in the out years forecast to be worse than originally thought. We are now expecting deficits of $44 billion in 2023-24, $51 billion in 2024-‑25 and $50 billion in 2025-26.

Debt

Rightly or wrongly, the previous Government’s COVID-19 response resulted in a huge increase in net debt. Net debt was $447 billion in June 2019 but rose 65% to $788 billion in June 2021. In percentage of GDP terms, the Australian Bureau of Statistics shows net debt went from 24.5% to 38.1% over the same period.

Debt has grown over the last year and stood at $892 billion as of 14 October.

This Budget has net debt forecast at $572 billion (23% of GDP) for 2022-23 before rising to $634 billion (26%) in 2023-24, $703 billion (27%) in 2024-25 and $766 billion (28%) in 2025-26.

As homeowners have been brutally reminded, rising interest rates mean it costs more to service debt. Government debt is no different, with the cost of debt servicing forecast to grow 14% annually for the next four years.

It would be economically irresponsible for the Albanese Government to open its wallet and start spending like a sailor on shore leave.

Increasing government spending now would not only feed the insatiable inflation beast, but also magnify skills and material shortages and increase the already eye-watering level of debt and the cost of servicing it.

Economy

Gross domestic product (GDP) is forecast to grow 3.25% this financial year but is expected to drop sharply to 1.5% growth in 2023-24. The previous Budget assumed 3.5% growth this year and 2.5% next year. This forecast for lower growth can be attributed to the global economic downturn and rising interest rates.

In a surprise to no-one the inflation forecast was adjusted upwards from 3% to 5.75% this financial year and from 2.75% to 3.5% in 2023-24. Peak inflation is expected to reach 7.75%.

Some respite is expected in the longer term, with inflation forecast at 2.5% for 2024-25 and 2025-26. The budget points the finger at high electricity and gas prices, pandemic supply chain disruptions and the war in Ukraine as the major drivers of inflation and raises the expectation of further price rises due to recent flooding.

The forecast unemployment rate is expected to be 3.75% in 2022-23 before rising to 4.5% in 2023-24 and 2024-25 — which is still remarkably low by historic standards.

This gradual easement of labour market conditions will be driven by a slowing of economic activity in response to global and domestic economic headwinds.

Commodity prices

The Budget assumes most commodities including iron ore and coal to fall to “levels consistent with long-term fundamentals” by the end of the March quarter of 2023. This may not be an iron-clad prediction but rather a prudent approach to budgeting.

By assuming prices are at long-term levels, any short-term volatility can be absorbed within budget parameters.

The long-term commodity price assumptions are:

• Iron ore – US$55 per tonne free onboard (FOB);
• Metallurgical coal – US$130 per tonne FOB;
• Thermal coal – US$60 per tonne FOB.

Revenue

Taxation

Tax receipts have increased since the March Budget due to higher company and personal income tax receipts, driven in turn by stronger corporate profits and higher employment rates. A strong Australian dollar and high commodity prices have played a significant role in boosting company profits.

However, by the end of the forward estimates period Treasury expects these factors to moderate, with commodity prices assumed to return to long-term levels, employment growth slowing, interest rates rising and weaker asset prices biting.

The Budget outlines measures to ensure tax is being paid fairly including extending compliance programs at the Australian Taxation Office and targeting multinational companies’ tax integrity.

Stage three tax cuts appear to be here to stay even though the cost has escalated to $254 billion over ten years. Corporate taxpayers are not so lucky with almost $2 billion extra forecast to be raised through measures aimed at multinational corporations.

Expenses

Savings

As promised, the Albanese Government expects to realise $10 billion in savings by adjusting commitments made by the previous government. This includes cutting $2 billion from discretionary grant programs and adjusting infrastructure spending to save $6.5 billion.

The motivation for this may not have been simply savings but also a readjustment of priorities as they pull spending from the Morrison Government’s priorities to pay for their own.

It will be interesting to see if the Albanese Government simply replaces these discretionary grants and infrastructure projects with their own in the next Budget or if there will be real, persistent savings.

We can all agree that a commitment to decrease spending on third-party contractors and consultants to save $3 billion and to save $570 million on advertising, travel and legal fees is good news and something all governments should keep in check.

Cost of Living

Cost of living pressures are front of mind for most Australians with inflation in June 2022 sitting at 6.1% and the cost of fuel reaching new records. As well as the physical and emotional damage experienced by those on the east coast, the current flooding can potentially have knock-on effects at the checkout.

The Government is stuck between an inflation rock and a cost-of-living hard place. They’re opposing forces and too much pressure one way undoes any gains on the other side. The Budget outlines five areas to provide cost-of-living relief:

• Cheaper childcare
• Expanding paid parental leave
• Cheaper medicines
• More affordable housing
• Policies aimed at aiding wage growth.

On the surface these measures appear targeted, and several have productivity and social gains associated. The balance looks to be right but only time will tell if Dr Chalmers has aligned the levers successfully.

Resources

Critical minerals were not discussed too often a decade ago, but they are certainly a major focus of this Federal Government. Following on from the weekend’s release of the Critical Minerals Strategy, the Budget contains $100 million over three years from 2022–23 for the Strategic Critical Minerals Development Program.

The program will support Australian producers with technical and market access barriers — but it simply replaces the Morrison Government’s $100 million Critical Minerals Accelerator Initiative from the March Budget, which will now be unwound.

There is also $51 million over four years from 2022–23 to establish the Australian Critical Minerals Research and Development Hub. This Hub will coordinate and align government, industry and academic research and development efforts.

Energy and climate change

The main initiative in the Budget to address climate change and assist in lowering energy costs is the Powering Australia Plan which will facilitate up to $20 billion investment in upgrading the ageing electricity networks to accommodate new renewable energy projects.

The government will use its own funding to leverage private sector investment in electricity infrastructure which will be needed to enable wind and solar farms to connect to the grids around Australia.

There will also be a specific $1.9 billion Powering the Regions Fund targeting regional opportunities for decarbonisation.

A proposed Driving the Nation Fund will invest $500 million to reduce transport emissions, including electric vehicle charging infrastructure.

The government has legislated an emissions reduction target of 43% on 2005 levels and net zero emissions by 2050 which is expected to drive private sector investment in renewable energy and decarbonisation measures.

Despite rising levels of debt there is always a need to spend on infrastructure and this Budget outlines $9.6 billion of infrastructure spending.

This includes $635 million for projects in Western Australia, including $400 million for the Tanami Road upgrade and $125 million for electric bus charging infrastructure in Perth.

Dr Chalmers also hammered in the final nail of the Roe 8 coffin with the removal of $1.2 billion allocated to the project.

Health and Aged Care

Despite COVID-19 only being mentioned once during the Treasurer’s speech last night, health remains a major area of spending for the Commonwealth. Of course, COVID-19 is still an issue and there was $1.8 billion worth of continuing support provided out to 31 December 2022 in this Budget, mostly to be delivered in Aged Care.

Some $770 million was allocated to provide cheaper medicines through the Pharmaceutical Benefits Scheme, delivering on a promise made in the lead up to the election. This funding will effectively decrease the general patient co-payment for treatments on the Pharmaceutical Benefits Scheme from $42.50 to $30.00 on 1 January 2023.

Other Health measures include:

• A $448 million boost to regional and rural health associated with bulk billing of video telehealth psychiatry consultations
• $220 million towards strengthening Medicare
• Specifically for Western Australia, $75 million over 5 years will be provided from 2023–24 to support the delivery of the Bentley Hospital Surgicentre.

Fulfilling another large election commitment, the aged care sector will receive reforms costing $2.5 billion aimed at improving care standards, installing a registered nurse in aged care homes around the clock and increasing general funding and transparency to the sector.

The aged care sector will also receive $810 million for additional support in managing COVID-19 and $35 million to continue in-reach testing.

Education and skills

Overall, there is $115 billion in education funding from 2022–23 to 2025–26 in this Budget as well as $265 million for the new Schools Upgrade Fund and $192 million for the Student Wellbeing Boost. The funds support capital works projects for upgrades to school equipment and to improve ventilation in classrooms to keep students and school staff safe following disruptions caused by COVID‑19, while also addressing student wellbeing.  There is also $1.7 billion from 2022–23 to 2025–26 allocated specifically for preschools.

To address teacher shortages, the Budget allocates $310 million over 9 years from 2022–23 (and $8 million per year ongoing) to attract and retain high-quality teachers and improve student outcomes. This includes funding for bursaries and incentives for people in other careers to switch into teaching jobs.

Early childhood education was one of the biggest areas of focus of this Budget with a commitment of $5.4 billion over the forward estimates to provide cheaper childcare.

Beginning in July 2023, the new measures will increase the subsidy for early childhood education for 90 per cent of families who earn up to $80,000 a year. The subsidy decreases by one percentage point for every $5,000 earned over $80,000, up to an income of $530,000.

This makes good an election promise of the Albanese Government and should make a positive economic impact by making it easier for around 37,000 people to return to work.

Tertiary education was somewhat of a focus with the Commonwealth committing to partner with the States and Territories to provide 480,000 fee-free TAFE courses over four years. This program begins in 2023 with 180,000 places at a cost to the Commonwealth of $550 million for that first year.

The Budget also funds 20,000 extra university places for students from disadvantaged backgrounds at a cost of $486 million.

Housing

In a move the Treasurer described as a big and bold ambition, a new Housing Accord has been struck between the Commonwealth, States and Territories, investors and industry. The Commonwealth will provide $350 million over 5 years from 2024–25 to support funding of an additional 10,000 affordable homes under the Accord.

State and territory governments will also provide up to 10,000 new homes, for a total of 20,000 new homes.

The Treasurer said that the Accord has been endorsed by institutional investors who will work with Government “to leverage more investment to deliver for their investors and members’ interests, and for the national interest.”

What exactly that means remains to be seen but if there is genuine, effective collaboration we could see some easing of housing issues in the future.

Additionally, a $10 billion Housing Australia Future Fund will be established to provide sustainable funding to increase housing supply and improve service delivery. This will be done in partnership with State and Territory governments and private capital providers.

The fund is expected to provide 20,000 new social houses, 4,000 of which will be allocated to women and children impacted by family and domestic violence and older women at risk of homelessness.

The remit of the National Housing Infrastructure Facility will be expanded and restructured to deploy up to $575 million in unallocated funding. This will provide 5,500 new social and affordable dwellings and attract more institutional capital to the sector.

Environment

The Budget included a record boost in funding of $204 million to protect the Great Barrier Reef. The funding will assist in delivering the Labor Party’s commitment to spend a record $1.2 billion to protect, manage and restore the historic reef.

To better manage our lands and water, the Budget included an initial investment of $92 million over six years to clean out and restore urban waterways, protect local species, and improve liveability. Along with this is a further $225 million towards saving threatened native species and implement the newly announced Threatened Species Action Plan (2022-2032).

Increased efforts to sustain Indigenous Protected Areas will receive an additional $67 million over five years. Complementing this, $15 million will support First Nations-led action to identify and protect heritage places.

To help meet emission reduction targets, the Budget announced the removal of fringe benefits tax and import tariffs for electric vehicles. This encourages more people to replace their internal combustion engine vehicles with electric vehicles at a cost to Government of around $54 million in foregone revenue.

To assist with the Government’s response to the Independent Review of the Environment Protection and Biodiversity Conservation Act 1999, $117 million will ensure that assessment and compliance activities continue.

Economy

This Budget delivered the biggest expansion to paid parental leave since its inception.

Some $532 million over 4 years will go towards expanding paid parental leave to 26 weeks by 2026. This leave can be reserved for each parent for two-parent families to encourage the sharing of care responsibilities, allow greater equality and allow both parents to spend time with their children.

A $15 billion National Reconstruction Fund will be established to support, diversify, and transform Australian industry and the economy. The fund will begin in 2023-24 and target co-investments in seven priority areas: resources; agriculture, forestry and fisheries sectors; transport; medical science; renewables and low emission technologies and defence capability.

Funding includes:

• $15 billion in targeted co-investments through independently assessed projects.
• $50 million over two years from 2022–23 to the Department of Industry, Science and Resources, and the Department of Finance to establish the Fund.

Disaster relief and resilience

Following the recent floods across several states, disaster relief was a focal point of the Budget, with up to $200 million per year to be spent on initiatives related to disaster prevention and resilience through the Disaster Ready Fund.

With disaster repayments to areas of New South Wales, Tasmania and Victoria already assisting those impacted, the Budget included $3 billion in the contingency reserve to meet the disaster recovery costs from this year’s floods.

Additional $38 million will be provided to Disaster Relief Australia for more than 5,000 extra volunteers.

First Nations People

Looking after our First Nations People was a key area in the Budget, with work underway to deliver the commitment to implement the Uluru Statement from the Heart in full. Some $75 million will be provided to prepare for the delivery of a referendum to enshrine a First Nations Voice to Parliament in the Constitution.

The first instalment of $6 million in a $28 million election commitment will go towards the establishment of an independent Makarrata Commission.

The Budget has outlined $50 million, matching the McGowan Government’s commitment, to jointly fund a state-of-the-art Aboriginal Cultural Centre for Western Australia.

First Nations People focused funding also consisted of $315 million for health infrastructure and training as well as $100 million for housing and essential infrastructure in NT homelands.

The budget also provides $14 million over 4 years from 2022–23 to partner with First Nations people and primary schools to teach First Nations languages and culture.

Regions

A total of $7.4 billion will be invested by the Labor Government into supporting regional development across the country.

Through the Priority Community Infrastructure Program and its Investing in Our Communities Program, funding of $1.4 billion will be provided for local community, sport, and infrastructure projects.

On the chopping block is $250 million associated with Round 6 of the Building Better Regions funding.

Replacing this fund are the Growing Regions Program and the Precincts and Partnerships Program together receiving $1 billion over three years.

This means those who applied for funding under the Building Better Regions will need to abandon plans (at worst), fund them without Federal Government funding, advocate for Government funding through other avenues or prepare new applications under the new program (at best).

Other

Other announcements of importance include:

• Foreign aid to be increased under this Budget with $900m more allocated for the Pacific and a $470m more for South-East Asia
• An additional $174 million for health, education, community safety and interpreter services in remote communities
• $63 million to support small and medium-sized businesses in improving their energy efficiently and reducing energy use
• An investment of a further $87 million over 2 years to improve veterans’ access to support and services
• $37 million in additional funding for visa processing to support a “surge capacity” of 500 staff over the next nine months
• $20 million over 4 years to set up 2 new expert panels on Pay Equity and the Care and Community Sector to support the Fair Work Commission, and
• $16 million to fund six projects to increase women’s workforce participation and representation in leadership.

Wellbeing

For the first time, the Budget included a section dedicated to wellbeing. Acknowledging we do not currently have an integrated approach to measuring non-economic benefits, the Budget has initiated the conversation around how to better measure wellbeing and what matters.

Treasury is working towards a stand-alone Measuring What Matters Statement for 2023.

Funding focusing on well-being within the Budget included:

• $532 million over 4 years for the paid parental leave expansion
• $475 million over 2 years to support student well-being and improve classrooms
• Supporting women’s workforce participation and advancing gender equality
• $1.7 billion over 6 years to support women’s safety working to end violence in one generation
• $16 million to extend the tailored small business mental health and financial counselling programs, NewAccess for Small Business Owners and the Small Business Debt Helpline
• 50 per cent loading for telehealth psychiatry services in regional and rural areas and expands the headspace network
• $47 million for 10 Veterans’ and Families’ Hubs across Australia, and

$32 million to fund Working Women’s Centres in every State and Territory.

 

— written with additional contributions from Michael Cairnduff, Richard Harris and Bree Liddell