The last time a new government brought down its first budget, in 2014, it was a disaster for all concerned.
Spending was cut by $14.2 billion over four years and receipts were increased by $3.2 billion – an extraction of $17.4 billion out of the economy – and the Prime Minister Tony Abbott and Treasurer Joe Hockey were extracted within 18 months.
This one, the first from the next new government, couldn’t be more different: Labor’s budget measures increase government spending by $22.9 billion over four years, and increase receipts by $13.1 billion. Net addition to the economy: $9.8 billion, which is about half of Labor’s $18 billion in election promises, so they are funding half of the promises from savings.
So it’s a giving budget, not a taking one. Hockey and Abbott tried to set themselves up to give later; Chalmers and Albanese are taking it one budget at a time.
Is this good or bad? Well, half of the extra spending is “unfunded”, and we saw what a mess unfunded tax cuts made of British PM Liz Truss.
But election promises are a different matter – there is a mandate for those, and no surprise. We all knew they would probably be unfunded and increase the deficit when the promises were made, and we voted for them anyway.
As promised, Treasurer Jim Chalmers has delivered a responsible first budget that lays some groundwork for difficult times to come, and should ensure that he’s still in the job beyond 18 months.
He set the scene for responsibility in this budget by cutting back forecast productivity growth from the 1.5 per cent that Josh Frydenberg used to boost forecast revenue, to a more realistic, but more difficult, 1.2 per cent.
What lies ahead
But the fact is that we are heading into a severe downturn, and possibly a global recession, with a deficit of 1.5 per cent of GDP rising to 2 per cent, and a lot of debt.
Not ideal, but unavoidable after a pandemic in which both the government and the Reserve Bank panicked and threw the kitchen sink at it.
The basic problem with government budgets is that they are still framed around the idea that surpluses are good, and deficits are bad, which is ridiculous.
Governments are not companies making profits and losses, paying dividends and growing the business by investing.
They are machines for redistributing money, from those who have got it to those who need it.
Running the government costs $30 billion, defence takes $38 billion and the rest – about $580 billion of income tax, GST and excise – is redistributed.
At the moment the tax revenue is falling short by about $50 billion a year, which has been reduced to $37 billion this year – or about the defence budget – by temporary measures.
Meanwhile, we have two incompatible political cliches: “cost-of-living relief” and “budget repair”. Can any Treasurer do both? Only if there’s a commodity boom.
The truth is that, as with most politics, cost-of-living relief and budget repair are far more talk than action.
The former has to be nothing but talk at the moment because the Reserve Bank is busily raising everyone’s cost of living to control inflation – anything the government does to offset that would risk the sort of chaos that the UK has been enduring lately.
And budget repair? Yeah right. Here’s a chart from the budget papers of the structural balance:
In his speech on Tuesday night, Jim Chalmers said: “Tonight, we take the first step – with a budget repair package that delivers $28.5 billion in improvements over the next four years.”
Well, yes, except those savings are entirely soaked up with other spending.
If there was any budget repair at all going on, those bars to the right of the middle vertical dotted line on that chart would be gradually diminishing.
No budget repair
There is no real budget repair, and let’s face it – the time to do it is in your first budget (but not going too hard, as Hockey and Abbott did).
Most of the time politics is all about announcing spending decisions, usually in a fluoro vest and hard hat, but once or twice a year mum and dad (that is, the Expenditure Review Committee) go through the books, looking haggard and shouting at the kids (ministers).
For a day or two everybody tuts about all the red ink if there’s a deficit, and wasted opportunities if there’s a surplus, before getting back to the happier business of redistributing cash for national, party and personal benefit.
So this week the National Disability Insurance Scheme is a terrible burden, increasing at 13.8 per cent a year, compound, to $102 billion a year.
For the rest of the year, the NDIS is one of the greatest welfare innovations Australia, and the world, has ever seen and, with Medicare, is loved by all.
The only reason it’s a burden, along with aged care, health, defence and interest, is that Australia’s tax revenue is insufficient, and also that deficits are “losses” and supposedly bad.
I have repeatedly written here that the arbitrary 23.9 per cent cap on tax as a percentage of GDP needs to be dispensed with, and that one of Jim Chalmers main jobs is to find a way to do that without losing government.
This week, former Treasury secretary Ken Henry, supported that idea, and Chalmers’ first budget actually does it – sort of.
Tax receipts are 22.7 per cent of GDP this year, but the budget papers predict that they will reach 24.1 per cent of GDP in 2032-33 – slightly more than 23.9 per cent for the first time.
That will still be nowhere near enough. The budget is in a structural deficit of 2 per cent of GDP and will be for well beyond the 10 years that Treasury wisely keeps its projections to.
Actually the budget is nearly always in structural deficit and as discussed here earlier this week, that’s a political issue, not an economic one.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news
