JACKSON HEWETT: ‘Buy now pay later’ Budget designed to lift animal spirits just in time for the election

Jim Chalmers has delivered the buy-now-pay later Budget, that potentially gives voters a pat on the back for toughing through two years of negative disposable household income.

But the signature policy, income tax cuts coming at a cost of $17 billion over the forward estimates, has a twist in the tale.

The cuts don’t come in until 2026-27, and even then are a relatively sober handout of up to $268 per person at a cost of $3b in that year. The real cost starts to add up in 2028-29, when the bill is two and a half times larger.

But in announcing the impending tax relief, the Treasurer gets to re-sell an old policy — the original Stage 3 tax cuts — and bring another big headline number to the election table.

The cuts are actually returning the impact of bracket creep, which was increasingly pushing lower income workers into higher tax brackets and wouldn’t be tax cuts at all if the country committed to genuine tax reform and indexed taxes to wage growth.

The Treasurer will sell it as putting more money back in the pockets of voters, who have been crunched by a cost of living crisis that he maintains he inherited.

That should help pump prime the economy, accelerating the lift in household spending, which has been on the up on continued low unemployment, moderate wage growth, and falling inflation and interest rates.

Dr Chalmers is hoping that unleashing animal spirits will help drive greater spending, and generate further investment, particularly in the homebuilding sector.

After the care economy spendathon of the first three years of Labor’s term, Dr Chalmers is now using another Keynesian trick to counter a new threat. Treasury believes Trump’s tariff tyranny will cause a trade related slowdown in the US to two per cent from 2.8 per cent and China to fall from 5 per cent to 4.75 per cent by 2027.

By contrast, Treasury has forecast a lift in growth for Australia from 1.1 per cent today to 2.75 percent by 2027, boosting nominal wages by 3.25 per cent along the way.

Dr Chalmers’ favourite chart undoubtedly is the Real Household Disposable Income which will show an 8.75 per cent turnaround from negative to positive by 2026-27.

The Government is hoping that lift in incomes is going to coincide with debottle-necking of the sclerotic construction sector, to supercharge dwelling investment to nearly $160b a year by the end of the forward estimates, jumping in terms of growth rates by 5.5 per cent next year and 7.5 per cent in 2026-27.

That is a massive lift in investment, which if not handled correctly, could cause the kind of cost breakout that has been so damaging for getting enough houses built in the past. There will need to be quite the upswing in tradies taking up the $10,000 apprentice incentives to take on that mammoth task.

Higher deficits

Handing out those tax breaks (or deferring the impact of bracket creep) loads the Budget with deficits well out to the next decade.

The government has managed to shave about a billion off the headline deficit for this year compared to that forecast in the Mid Year Economic Outlook and keep the forecast for next year’s deficit at a relatively similar $42b.

It’s in the out years when the impact of the $179b of Budget deficits starts to kick in but Lucky Jim will be counting on that pickup in GDP growth to make the ratios look better.

If Treasury is right, and the economy grows at 2.75 per cent, the deficit to GDP ratio will drop from 1.5 per cent to 1.1 per cent. To put that in perspective the deficit to GDP ratio forecast for the US is 6 per cent, and at a level where they are worried enough to sic Elon Musk onto the job.

But that is the underlying deficit, which fails to account for the so-called off-budget investments, that theoretically can generate a return, such as the Snowy Hydro Scheme, and student HECS debts.

Taking those into account and this year’s total Budget headline deficit is $65b and adds another $103b over the forward estimates. Among those are $21b in funding for the Clean Energy Finance Corporation and $12b for Housing Australia.

Those ongoing deficits will contribute to a gross debt that still surpass $1 trillion next year and keep kicking on to $1.2t by the end of the estimates.

Again, the international comparison is the Treasurer’s friend. Gross debt is expected to peak at 37 per cent of GDP, well below the 100 plus per cent of other advanced nations.

But while the Treasurer will be at pains to point out how low our debt is compared to peers, they are increasingly a thorn in the Budget’s side.

Interest on debt is the fastest growing component of Budget expenditure, growing at nearly 10 per cent annually over the medium term to peak at 1.6 per cent of GDP. That is significantly faster than the 8 per cent growth in the NDIS, or 6 per cent annual growth in defence spending or hospitals.

The Treasurer and the Finance Minister will talk up the interest saved by banking some $200b of revenue upgrades thanks to a higher than expected iron ore and coal prices, and better than expected employment.

But the surprise upgrades are getting slimmer by the year, falling from $120b in the 2023-24 Budget to just $20b in last year’s MYEFO.

With China’s growth forecast to slow, those upgrades won’t help the Budget anywhere near as much, which is why the Government has appeared to slam the breaks on other spending programs in the near term.

From spending growth of over 8 per cent last year, the Government forecasts no change in spending growth for the next two budgets. It picks up again in 2027-28.

That allows the Treasurer to, on paper at least, counter the Coalition’s attack line of Labor being a tax and spend government.

The brake on spending also makes the medium term estimates look much healthier, and the government is suggesting it will get debt down.

That relies on taxation receipts heading up and to the right in the chart showing the revenue out to 2035-36, but spending staying flat all that time.

That would put the Budget in much better nick, but only Saint Nick would believe it.

For now, this is a Budget designed to ride the coat tails of an economic turnaround, and the details can come after the election.