A federal election always makes for a giveaway budget and this year it’s no different.
A short-term focus on assistance for voters – sorry, taxpayers – that will run for six months, or past the May election and end somewhere in the latter part of 2022, leading the new government to face pressures for the handouts to continue.
That is unsustainable and this budget will be dead once the polls close on election day, and even deader if the ALP wins because they say they will have their own budget.
The deficit will be $78 billion or 3.4% of the projected GDP for 2022‑23. Without more than $9 billion in obvious elections giveaways, the deficit could have been well under $70 billion and debt would have been reduced and closer to $30 billion lower than the December update instead of $20 billion.
The budget does take a very political look at addressing the myriad problems facing the economy and voters (AKA taxpayers). There’s cost of living pressures, which are in reality, potential barriers to the government being re-elected if not addressed.
There’s the war in Ukraine that has pushed energy prices – particularly petrol – higher, adding to the build-up of inflationary pressures in the wider economy. That can’t be controlled and the 50% cut in fuel excise for six months is an election Band-Aid and nothing more.
And of course, Covid remains a concern, infections continue in their tens of thousands a day and it is starting to threaten the Chinese economy’s health and stability with the current rolling lockdown of Shanghai a big test for our largest export market.
Record rains and floods have badly hurt tens of thousands of people and their lives in southeast Queensland, northern NSW and the greater Sydney region, especially those in the northwest.
There’s an insurance cost of $2.5 billion and billions of dollars of more costs in replacing infrastructure, helping the rebuilding of roads, cities and towns.
Covid twice hit jobs in the past year – Delta and then Omicron and yet, as the Australian Bureau of Statistics data shows, the unemployment rate is at 4% and equal to the lowest it has been in half a century.
Retail sales data for January and February clearly show that consumers have resumed spending heavily – especially in cafes, restaurants and similar mostly outdoor outlets, helping boost employment.
Treasurer Frydenberg’s pre-election budget was well leaked, especially all the goodies.
A commentary in the Australian Financial Review wondered if the Treasurer’s giveaway budget could end up leaving the country much more exposed to other negative shocks and there have been plenty of those in the past two years from the bushfires, to Covid in its various forms, record rains and floods not to mention surging inflation, energy prices and the fears generated by Putin’s war in Ukraine.
The improvement in the budget deficit (from higher tax and other revenues from soaring commodity prices and the recovery of iron ore prices back over $US150 a tonne from a low of $US87 a tonne last November will help finance some of the handouts, but it will see voters given cash paid for with debt.
The short-term approach in the budget – really 6 to 8 weeks until the poll in mid-May – will leave voters and the economy adrift after that.
Whoever is treasurer after the election will be left holding a budget deep in the red, higher government borrowing costs and pressures on inflation that will not be eased by a cut in the fuel excise.
There’s around $9 billion in cost of living “assistance” – in reality payments to voters to keep them sweet.
Since last year’s budget, federal government receipts have been upwardly revised by $223 billion over the forward estimates.
That flows from a stronger economy, stronger employment (an estimated $11 billion a year saving in unemployment payments next year alone) and even stronger prices for commodities as our terms of trade remain high instead of fading quickly as was forecast a year ago plus higher inflation and bracket creep has filled the government’s coffers.
But the Morrison government has also increased spending by almost $143 billion over the next four years.
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The deficit will be $78 billion or 3.4% of the projected GDP for 2022‑23, with Treasury estimating that to halve over the next three years.
While that was $20 billion lower than the estimate in the December midyear economic update, next year’s estimate is only be a marginal improvement on the $79.8 billion forecast for the year to June 30.
In view of the surge in tax revenues from the commodity price boom and higher terms of trade, that’s a piddling reduction.
Indeed, there is very little that will boost the sharemarket – much of it has been leaked and there are plenty of one-off payments.
The forecast rises in wages is small, the forecast rise in household consumption is large and it seems hard to believe that won’t have a negative impact on inflation which is forecast to fall sharply in 2022-23.
If that’s believable then perhaps the Reserve Bank won’t be lifting interest rates at all.
Net debt as a share of the economy will peak at 33.1% in 2026 at a still very high $1.2 trillion.
Inflation is tipped to fall from 4.25% this year to 3% in 2022-23 – an optimistic call which presupposes a sharp slide in the cost of petrol and oil prices over the next 13 months.
Wages are forecast to rise from 2.75% this year to 3.25% next year as unemployment falls to 3.75% from the 5$ rate at the moment.
If the government and Federal treasury get this forecast right (and it and the Reserve Bank have missed many of their forecasts for wages growth) it will see real wages growing by just 0.25% in 2022-23 – which is nothing to boast about with all the election goodies having ended (even if the government is re-elected) and 10 million taxpayers facing an end to their $1,080 low- and middle-income tax offset next year.
Of course, the 2.75% forecast for this year means mean “real” wages will fall 1.5% short of inflation in the year to June and the small rise next year will not recover much of that.
The government reckons household consumption – which accounts for more than 60% of economic activity – will grow by 5.75% next financial year after a solid 3.5% this financial year.
Since last year’s budget, federal government receipts have been upwardly revised by $223 billion over the forward estimates. The government though has boosted that by $143 billion.
There’s typical sleight of hand buried in the budget papers
While low- and middle-income earners will get a one-off increase of up to $420 in their annual tax offset when they submit their tax return for this financial year (costing the budget more than $4 billion) and pensioners and other welfare recipients will benefit from the one-off $250 payment (costing $1.4 billion).
The election-conscious treasurer and the government are making sure this hits bank account before election day in mid-May (And the 50% cut in the petrol excise for the next six months started at midnight on Tuesday). That costs the budget $2.9 billion
However Mr Frydenberg made no commitment to continue the low- and middle-income tax offset in the coming 2022-23 financial year.
If it is not continued then the 10 million-plus taxpayers earning up to $126,000 a year (the cut off for most of the pre-election assistance’) will see their income tax increased by up to $1080 a year, from July 1. But they won’t feel it for at least a further 12 months, when they discover their tax refund is much smaller than they are used to.
This will increase tax collections by about $8 billion a year, and pay for almost all the cost of the three temporary cost-of-living measures announced in the budget.
And finally, debt – we know that it will peak in 2026 (or is forecast to peak) at 33.1% of GDP.
And yet after the GFC and the Russ-Gillard ALP governments it had risen to 13% of GDP from a surplus at the end of the Howard years. By the time the pandemic hit, the Abbott and Turnbull and Morrison governments had risen to 19% of GDP.
This budget takes that figure to 31% of GDP. And, with no deficit or debt reduction plan in the election budget that will rise to the 2026 estimate of 33.1%.
The interest cost will be $15 billion rising to $22.4 billion in 2026.
