You can at least credit the Coalition with not being subtle.
This was always going to be a budget to get re-elected rather than one that bothered with anything so tawdry as economic growth or ongoing structural issues in the economy. Pass the sugar and keep heaping it out until the election – and we’ll deal with the consequences later.
This would all be fine and reasonable if the budget papers themselves did not reveal that the government fully expects that the economy, after this injection of economic glucose, will return to the meagre growth levels of the pre-pandemic period and that real wages will remain below what they were at the 2019 election until 2025.
First let’s look at the reason the government is boasting about a better-than-expected deficit and also why it is being so free with one-off spending. Since the dark days of the pandemic and the 2020-21 budget, the government has found itself with about $270bn extra revenue from 2020-21 to 2024-25 than was initially expected.
Rather astonishingly, the Treasury now expects $133.5bn more tax revenue over the five years from this financial year out to 2025-26 than it did just three months ago in December’s mid-year economic and fiscal outlook:
And so, rather than a $106.6bn deficit this financial year – as was expected last year – the government now expects the deficit to be a “mere” $79.8bn.
This equates to about 3.4% of GDP, a figure well down on the 6.5% of GDP deficit in 2020-21 but still the fourth-biggest non-pandemic deficit on record – and bigger than all but one year of the global financial crisis.
The reason it is not worse is purely that extra revenue, because if there is one thing we can be grateful for, given the coming election, it is that there was no way this was going to be an austerity budget.
Over the next four years, government spending will fall from 27.2% of GDP in the next financial year to 26.3% in 2025-26.
While that might sound like a big cut, recall that it would still be 0.4% of GDP (or about $10bn by 2025) more than Labor’s Wayne Swan ever outlaid in his time as treasurer – including the year of his biggest deficit in 2009-10:
This is not to criticise the government – worries about budget deficits and debt truly get far too much attention, especially when, as we have seen, debt itself has very little to do with inflation and interest rates.
And yet despite the surge of extra revenue and spending, there is little to look forward to, once you actually look past the next year and the federal election.
The economy is expected to grow slightly above average next year but then from 2023-24 onwards we are back to 2.5% growth.
That is essentially where we were for the years after the GFC leading up to the pandemic – years that were not by anyone’s measure strong.
But when we look at the level of public demand dropping off in 2023-24, is it any real surprise?
The government might not be practising austerity now but it still believes the private sector should deliver growth. And unfortunately it appears unable to deliver more than a middling amount:
But the real lack of ongoing economic health is most evident in wages. Last year inflation grew by 3.8%, compared with just 1.7% for wages. This real wage decline has continued this year, with inflation growing 1.25 percentage points faster than wages.
The government expects with some (as usual optimistic) assumptions that real wages will grow in 2022-23 and beyond. But so massive has been the hit to real wages in these two years that it is not until 2025 that the government expects the value of real wages to return to above what they were at the 2019 election – and that is assuming inflation falls quicker than many economists believe it will:
And what about those wages forecasts? Well, as we know, this government has not had a great record of forecasting wages. Sally McManus and Anthony Albanese have been declaring that since the 2012-13 Myefo the government has made 55 wage predictions, 52 of which have been wrong. At least the last few have been not over-optimistic and should come to pass, but I fear we are again returning to the realms of the predictive sins of previous budgets:
As I have been noting regularly since 2016, the relationship between wages growth and unemployment has shifted significantly. In the past the government has always desired to see wages growth increasing sharply, despite little changes in the unemployment rate.
Once again we see the same. While not as egregious as previously, such as in the 2019-20 budget when it was predicted wages growth would jump from 2.5% to 3.5% in four years despite no fall in unemployment, there is still expected to be a strong increase in wages growth above what we have observed since 2016:
This would definitely be welcome, but fool me 52 times …
The lack of real wages growth is the reason the government has had to force itself to dole out the tax cuts. As I noted last week, had the government merely kept in place the low to middle income tax offset (LMITO) there would actually have been no tax cut, just a continuation of one already in place – but one which is forever a “one-off” temporary measure.
Now the government has added another one-off temporary measure – an extra $420 flat rate to the LMITO.
This of course has not stopped the government from boasting that you will get up to $1,500 in tax relief (the previous maximum of $1,080 plus the new $420).
Crucially, this is just for this year.
What it means is this year someone on the median income of about $60,000 will receive a 0.7% tax cut.
But should the LMITO not be extended next year, that person will receive a 2.5% tax increase next year:
It becomes in effect a tax cut that will forever be delivered anew, and not actually made permanent – unlike the stage three cuts, due to come into effect in 2024-25, which will give someone on $200,0000 a 4.5% tax cut.
And this is the real heart of why this budget is just a sugar hit with no sense of ongoing growth.
The government predicts households will continue to spend in big numbers, with household spending growing by 5.75% in 2023-24. That would be the biggest annual increase in household consumption since 1974-75, and yet it would come at a time when real wages are lower than in the past and the offsets are projected to be removed.
So how will we keep spending?
By reducing our savings. The budget predicts that the savings rate will fall from its current level of above 10% to below 5%.
The government hopes you have saved up and are ready to spend over the next few years, because it knows your actual ability to spend will remain less than it was in the past for at least three or four years to come.