Australia poised for budget recovery indicates fiscal restraint

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By Webdesk


Treasurer Jim Chalmers expected to announce a prudent budget as the central bank fights high inflation.

The Australian Labor government will reveal a huge improvement in its budget outcome next week as the treasury is overflowing with fiscal windfalls, but the outlook will be bleak as fiscal challenges remain high.

Treasurer Jim Chalmers has used “restraint” and “responsibility” for weeks to describe his second budget since taking office in May last year.

There will be some money to offset cost-of-living pressures, especially energy prices, and perhaps a long-delayed rise in unemployment benefits. Chalmers has signaled increased support for renewable energy projects and an increase in defense spending in view of China’s growing influence in the region.

Yet he is well aware that too much fiscal generosity could fuel inflation, just as the Reserve Bank of Australia has been aggressively raising interest rates to combat it.

Instead, the idea is to invest any budget savings, and there’s plenty to do. High prices for Australia’s commodity exports have boosted mining profits, while job gains have boosted income tax revenues and reduced benefits.

As recently as October, Chalmers predicted a deficit of nearly 37 billion Australian dollars ($24.5 billion) for the year to the end of June 2023. Now analysts expect it to be closer to 5 billion Australian dollars ($3.3 billion).

Indeed, the current 12-month total is a surplus for a budget that hasn’t been black since 2008.

The previous Liberal National government had ‘Back in Black’ mugs made in 2019 when it came within a whisker of a surplus only for emergency pandemic spending that punched a record-breaking hole in the bills.

However, any surplus would be transient as commodity prices are well behind their peaks and the domestic economy slows in the face of a decade of high interest rates. The latter have also sharply increased the financing cost of the national debt of nearly $1 trillion ($662 billion).

Labor has also pledged to honor a commitment from the previous government to cut income tax from next year, cuts expected to cost Australian dollars $254 billion ($168 billion) over the first 10 years.

The cuts are not particularly popular with the public as the vast majority go to better-paid Australians, but Labor is unwilling to break an election promise and appears boxed in.

More money is needed for health care, particularly to fund a national disability scheme, and there are election pledges for childcare and infrastructure.

Defense is poised for its biggest increase since World War II on plans to spend 368 billion Australian dollars ($244 billion) on nuclear-powered submarines from the United Kingdom and United States by the 2050s.

“Expenditure on interest payments, pensions, medical services, defence, aged care and hospitals are all expected to be consistently above the rate of inflation,” said Stephen Halmarick, chief economist at the Commonwealth Bank of Australia.

“Making the budget more sustainable in the medium term requires an increase in revenue streams and/or more spending discipline,” he said.

In short, like most developed economies with an aging population, Australia sees deficits as the new normal.



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