It’s been described as a Hot Chocolate budget: everyone’s a winner.
But some experienced budget watchers are warning the sugar hit now could leave a bitter taste for future generations.
“We can’t expect budget surpluses within the next generation – within 20 years, maybe longer,” concludes Stephen Anthony, chief economist at Macroeconomics and a former Treasury official.
“That’s why I call it the vandal’s budget, because it really is an assault on the sustainability of the Commonwealth budget.”
He says the budget now has a “structural deficit” equal to 3 to 4 per cent of the annual output of Australia’s economy.
A structural deficit is where the budget will still be in the red even when the economy is performing around the average levels that economists expect.
In the current circumstances, it means the budget will remain in deficit long after the COVID pandemic is over and the economy has bounced back.
UBS economist George Tharenou points out that the forecast $57 billion deficit in 2024/25 (2.4 per cent of GDP) is actually larger than was forecast at the previous MYEFO update in December, despite a stellar economic rebound since then.
“The materially stronger-than-expected economy improved the budget position by a cumulative $104 billion over five years,” he notes.
“Surprisingly, however, this was almost completely offset by policy decisions (i.e. that deteriorate the budget balance), which provided far more than expected additional fiscal stimulus of $96 billion over five years.”
The deterioration of the 2024-25 budget forecast shows how persistent this extra spending is.
‘Piecemeal approach’ lacks reform agenda
Stephen Anthony is highly critical of much of it.
“This is typical of a government that’s very piecemeal in its approach,” he laments.
“There are some good elements to some of the things that it’s doing, but it doesn’t connect that to a broader reform agenda, say like the New South Wales government.
“It essentially is creating leaky buckets all over the economy, that will never fill and therefore never collect revenue in the future.”
Economist Andrew Charlton is managing director at Accenture Australia and was an economic adviser to then-prime minister Kevin Rudd throughout the global financial crisis.
He is less harsh on the budget overall, but says Scott Morrison’s government hasn’t learned from some of the mistakes the Rudd government made a decade ago.
“When push came to shove, Morrison and [Treasurer Josh] Frydenberg did the right thing for the economy in putting together a big package,” he says of last year’s emergency stimulus measures, such as JobKeeper payments, tax breaks for businesses, and increased welfare payments.
However, he adds that: “This budget bakes in a lot of spending that’s not one-off spending, but ongoing spending.”
“The childcare measures, the tax cut measures, the unemployment benefit measures, all of those are spending measures that will last a long time and make it very difficult to get back into balance.
“It took 10 years after the global financial crisis for the budget to get close to balance.
“This deficit is much higher than the global financial crisis. So, we have a very long way back to surplus for Australia.”
Budget gets a ‘solid B’ and maintains AAA
The Grattan Institute’s chief executive, economist Danielle Wood, has a more positive assessment of the budget.
“I’d give it a solid B. This is a good budget,” she concludes.
“The government set out what I think is a good fiscal strategy and it said, ‘Let’s push unemployment down. Get wages growing again.'”
Ratings agency Fitch takes a similar view, in reaffirming Australia’s AAA credit rating, albeit with a negative outlook.
“The underlying budget assumptions appear credible, including the use of conservative iron ore price and employment forecasts,” says its director of Asia-Pacific sovereign ratings Jeremy Zook.
“In our view the government’s plans to support employment and firm up the post-COVID economic recovery through tax cuts and job creation measures should help boost medium-term growth, which in turn is positive for the medium-term debt trajectory.”
Stephen Anthony disagrees, pointing out that Australia’s economy is growing so strongly at the moment that it doesn’t need so much continued stimulus, especially given the surge in a range of asset prices, notably housing.
“You ask yourself, do I need to do anything else for the coming year or future years to drive the economy forward?” he questions rhetorically.
“I would answer no, that’s procyclical, you are actually throwing fuel on the fire, which will cause other economic imbalances down the track.”
Extra stimulus may push up interest rates
George Tharenou agrees and warns that some of the benefits to households and businesses from all this extra spending may come with a cost – higher interest rates.
He argues that the persistence of stimulus “for several years ahead” despite nearing full employment will put upward pressure on wages and inflation.
“We still expect the RBA to hold the cash rate until end-2022, but we now see the risk of an earlier rate hike than the RBA’s forward guidance of 2024.”
Stephen Anthony sees the risk of higher interest rates as just one of many ways in which Australians may end up repaying the current budget largesse in the future.
“These deficits and this debt that we’re racking up has to be paid for eventually in some way. It may not be the obvious way,” he explains.
“So the obvious way is higher taxes. It could come through higher debt interest burden, a risk premium. And obviously everybody paying higher interest rates relative to the world.
“Or it could come in the most subtle way, which is sort of financial repression. This is where, essentially, the RBA monetises the debt through monetary expansion, which it appears to be trying to do, and all of us earn lower returns on the assets that we have invested in superannuation and other investments across the economy.”
COVID caution or electoral ploy?
Certainly, as evidenced in the budget forecasts, the government says it is in no hurry to bring the deficit back down towards a budget balance.
“Fiscal repair will come once we see that employment rate at levels that indeed are … pointing towards growth in wages, a strong economy,” Finance Minister Simon Birmingham told The Business on budget night.
“We are very pleased with the economic strength and resilience Australia has shown, but the global uncertainties are enormous right now, the risks that we face are still significant, and that’s why we’ve had to continue to invest, to drive that jobs growth and to manage the COVID pandemic.”
Stephen Anthony takes a more cynical view of the government’s fiscal strategy.
“It does look like we do have to take a more aggressive approach to repairing the structural budget,” he argues.
“Obviously, there’ll be a time for that and, presumably, the government’s judgement is that that’s after the next election.”
Andrew Charlton is in no doubt about the politics of the government’s budget.
“We don’t know where the hammer is going to fall here in Australia,” he says of likely future spending cuts or tax increases.
“But this budget is a pre-election budget and there is no question there is a lot of hard roads to go in terms of fixing the situation.”
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