By Stephen Bartos, University of Canberra

Treasurer Jim Chalmers has been bitten by the giveaway bug. This budget contains not only the well-foreshadowed tax cuts for all taxpayers, but a range of new spending measures in health, education, infrastructure, aged care and more. There are few savings measures.

There are no new taxes, only the promise of stronger tax compliance from the Australian tax office in receipts. On the spending side the largest saving comes from reduced spending on consultants and contractors to government.

This is bad news for any consultants who evade tax, but good news for almost everyone else.

Chalmers delivered a A$22 billion surplus in 2022-23. Barring some extraordinary disaster, he will deliver another, predicted at $9.3 billion, in the current year.

But it stops there. From the next financial year onwards, the budget year, and the three forward estimates years, it’s all deficits.

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In isolation, whether a government has a surplus or deficit is not significant. It is largely a consequence of what are called “automatic stabilisers”. When the economy is doing well, unemployment and its associated benefit payments fall, income and company taxes rise. The reverse happens in a downturn.

For the past two years, the government has reaped the benefits of high employment and a booming iron ore price. To its credit, it has chosen to bank most of that windfall. It could keep doing that – but at a high political cost.

A key factor has been that notorious villain, bracket creep. As people’s incomes rise, they move into higher tax brackets and pay more income tax.

Eventually taxpayer patience is tested, and governments feel obliged to deliver back some or all the creep in the form of tax cuts. That inspired the previous government’s Stage 3 tax cuts, which have found their way, following much modification, into the latest budget.

This, together with Treasury’s forecast on iron ore prices, are the main reasons why there is less of a windfall for the treasurer to bank in 2024-25. He is faced with new spending programs to deal with cost of living, energy transition and housing pressures.

On top of that, the budget reveals traditional Labor priorities in terms of spending on health, infrastructure and education, and some bipartisan ones like defence. It is little wonder the deficit has grown to $28 billion in the budget year, $42.6 billion in 2025-26.

The budget laid bare

The story is laid bare by the wonderful reconciliation table in Budget Statement 3.

This table sets out what changes to the budget numbers come from government policy decisions, and what arises from factors outside the government’s control (for example, the outcomes of wage cases, changes in numbers of participants in the NDIS, or natural disasters).

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In 2023-24 the factors outside government control added to the budget bottom line by far more than government spending decisions reduced it. In the budget year, 2024-25, this no longer happens.

The net impact of factors beyond the government’s control is only $51 million, hardly more than a rounding error in the budget totals. Government policy decisions reduce the budget balance – that is, they amount to net spending– by $9.5 billion. It is a similar pattern in each of the forward years. That is why we have deficits in those years.

Nevertheless, they are only modest deficits, 1% or less of Australia’s economic output (GDP) in all years but 2025-26 (still only 1.5% of GDP).

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If, as the government predicts, inflation drops below 3% in each of the budget and forward years, there is little in the fiscal policy settings to prompt the Reserve Bank to raise interest rates. The far more important drivers of inflation are overseas and domestic business conditions.

Inherently a modest deficit like this is sustainable. If all the forecasts pan out, the government is on track to gradually reduce debt over time. This is important for intergenerational equity, not burdening future generations with the national credit card bill.

In fact, there is potential for unexpected surpluses in future years if the iron ore price defies Treasury predictions and remain high. For years now, Treasury has been predicting iron ore prices will return to trend levels. Eventually they must be right. In any one year though, it’s hard to pick.

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What drives this is not Australian domestic demand but China’s.

That is very hard to predict. It does appear China’s economy has been slowing in recent years, due to changes in domestic priorities.

This could drive down Chinese demand for Australian iron ore and thus prices. But again, it might not. Forecasting China is notoriously difficult. Still, mostly our surprises on this front have been positive – and that might happen again.

Major cuts and new spending

• $3.5 billion over three years for energy bill relief
• $3.4 billion over five years for new and amended drugs to be added to the Pharmaceutical Benefits Scheme (PBS)
• Up to $3 billion over five years for other pharmaceuticals measures, including freezing the prices of prescription medicines
• $1.3 billion over five years for income tax cuts for all taxpayers
• $2.2 billion over five years for implementing more recommendations from the Royal Commission into aged care
• $1.9 billion over five years to increase the rate of Commonwealth rent assistance
• $19.7 billion over ten years for boosting renewable industries
• $1.1 billion over five years to pay superannuation on government-funded parental leave
• Wage increases for aged care and childcare workers

Key cuts and spending by policy area

Cost of living

Cuts and revenue

No explicit cuts

New spending

• The government has budgeted $7.8 billion in cost of living relief across multiple measures
• $3.5 billion of that is for energy bill relief. Households will benefit from a $300 rebate, and small businesses a $325 rebate from July 1
• There’s $1.9 billion to raise the rate of Commonwealth rent assistance by 10%. That’s on top of last year’s 15% boost.

Health

Cuts and revenue

No explicit cuts

New spending

• $3.4 billion over five years is set aside for adding new drugs to the PBS or amending existing listings. This includes listing two drugs for treating COVID and others for MS, leukaemia, kidney disease and breast cancer
• The government will freeze the price of prescription medicines at a cost of $484 million over five years. For general patients, prescriptions won’t cost more than $31.60, but just for 2025. If you’re a pensioner or concession card holder, scripts will be capped at $7.70 from the start of next year until the end of 2029
• There’s also $588.5 million to create a national fee-free digital mental health service and $227 million over three years for 29 new Medicare urgent care clinics.

Housing

Cuts and revenue

No explicit cuts

New spending

• $6.2 billion has been added to the Homes for Australia plan, bringing it to a total of $32 billion. The government aims to build 1.2 million new homes in five years from July 1
• There’s $1.9 billion in loans for community housing providers to build social and affordable homes under the Housing Australia Future Fund and the $1 billion promised for accommodation for women and children fleeing domestic violence.

Climate

Cuts and revenue

No explicit cuts

New spending

• $19.7 billion over ten years is budgeted to “support Australia to become a renewable energy superpower” as part of its Future Made in Australia plan. The money will flow to industries dealing in renewable hydrogen, green metals, low-carbon liquid fuels, processing critical minerals and manufacturing clean energy supply chains, like solar panels
• There’s $1.7 billion over ten years for the Future Made in Australia Innovation Fund to develop some of these industries and $519 million for the Future Drought Fund to help farmers and rural communities better prepare for climate change and drought.

Community Services and Sports

Cuts and revenue

No explicit cuts

New spending

• The government will spend $2.2 billion on implementing more recommendations from the aged care Royal Commission. $1.2 billion of that is to be spent on digital systems upgrades
• Wage increases for aged care and childcare workers have been budgeted for, but it doesn’t say how much wages will rise by and how much it will cost
• $531 million over five years will fund another 24,000 home care packages and $468.7 million over five years is set aside to continue cracking down on fraud and exploitation of the NDIS
• The already-announced $925 million over five years will make the Leaving Violence Program permanent, providing financial support to victim-survivors of intimate partner violence
• $1.1 billion over five years will fund super payments to parents on government-funded parental leave
• Changes to who’s eligible for JobSeeker will cost $41 million over five years. Singles with a capacity to work zero to 14 hours a week will be eligible to receive the payment from September this.

Education

Cuts and revenue

• $57.2 million in savings over four years by stopping funding for scholarships under the Destination Australia program

New spending

• $1.1 billion over five years will fund the first stage of the Universities Accord, including the announced payments to students doing professional placements and courses preparing people for university. The government announced a target of eight out of ten workers having obtained a tertiary qualification by 2050
• $88.8 million is budgeted for 20,000 more fee-free TAFE and VET places for construction-related courses
• There’s also the capped indexation on university student loans. These will be indexed to match either the Consumer Price Index or the Wage Price Index, whichever is lower, at a cost of $239.7 million over five years.

Infrastructure

Cuts and revenue

No explicit cuts

New spending

• $4.1 billion will fund 65 new infrastructure projects over seven years. This includes $1.9 billion for roads in Western Sydney
• There’s $10.1 billion over 11 years for existing projects, including $3.2 billion for Victoria’s North East Link and $1.2 billion for a rail line between Brisbane and the Sunshine Coast.

Small Business

Cuts and revenue

No explicit cuts

New spending

• The $20,000 instant asset write-off has been extended until June 30 2025 at a cost of $290 million.

What's Missing

• Defence didn't get a lot of new emphasis, bar the existing $50 billion over the decade funding commitment under the National Defence Strategy.
• Agriculture and First Nations also didn't get a lot of attention, nor did considerations about how to grow productivity.

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This article is republished from The Conversation under a Creative Commons license. Read the original article.

Stephen Bartos, Professor of Economics, University of Canberra