JACKSON HEWETT: Super soaker Federal Budget no cure for a rainy day

Coming up to an election, both Labor and the Coalition have decided that now is not the time for fiscal restraint.

The Coalition were heading in that direction, but Elon Musk has taken a chainsaw to the notion that slashing spending is cool.

It’s remarkable how quickly events can change. Barely a few months ago, Angus Taylor thought he was onto a winner with his talk of ‘fiscal guardrails’.

Now, with Trump crashing the global economy and tearing up alliances, the Government’s spending splurge looks like a necessary backstop.

But the true test of where the Budget is heading is further down the road — after all, Trump’s presidency is only nine weeks young, and who knows what other spoonbending ideas are inside Trump’s and Elon Musk’s minds.

The Budget will be full of spending items still trying to deal with previous policy failures — energy rebates and rent assistance to name just two — which merely paper over the cracks of genuine reform.

Seasoned Budget watchers are worried.

As Deloitte Access Economics points out, Jim Chalmers’ much-vaunted fiscal repair was driven by revenue upgrades boosted by commodity prices, helped by a falling dollar, stronger-than-expected population and employment growth, and inflation.

“With commodity prices off their peak and inflation moderating, that marks the end of cyclical revenue windfalls,” Deloitte warns.

They can see that China, already suffering from a massive property overbuild and facing a working-age population that will decline by 25 per cent in the next 20 years, is unlikely to need anything like the amount of iron ore or coal that filled Australia’s coffers during previous downturns.

With China announcing a ‘rationalisation’ of its steel industry at its most recent economic plenary — meaning more unprofitable steel mills closing up shop — it appears Trump’s tariff policies are fast-tracking China’s rebalancing to a consumption-led domestic economy that will need less of Australia’s raw material.

But China accounts for eight per cent of Australia’s GDP and 30 per cent of our exports, and with its reduced consumption will go the unforeseen revenue upgrades that have helped prop up previous budgets.

The country is also pulling back on immigration, while global growth is forecast to slow.

The Treasurer, who has made much of his efforts to get the Budget back into better nick by turning Coalition deficits into two Labor surpluses, is primed to deliver four years of fresh deficits to the next Government.

Having talked up the savings from getting COVID-related gross debt down, Mr Chalmers will forecast a decade of deficits and says it “remains to be seen” when a surplus will return.

By international comparisons, which the Budget papers will trumpet, Australia is one of the lower-debt nations. And that is in a world where government debt is set to balloon across the developed world.

Canada is taking the fight to the US if Mark Carney wins, and the only way to support businesses in the face of tariffs (not to mention the declining tax take from exports) is more government spending.

Germany has let loose its own fiscal guardrails to beef up defence spending in the face of Russian aggression and US retreat.

The US, despite the best efforts of DOGE, has a debt level at 120 per cent of GDP, and is nowhere near getting deficits down below six per cent of GDP.

Australia by comparison has a debt-to-GDP level of 30 per cent and a forecast peak deficit to GDP of 1.6 per cent of GDP.

But decades of deficits will add to Australia’s debt load, and the country is worryingly short of ideas to generate new sources of revenue.

Growing spending on the care economy, including the age pension, Medicare and the NDIS, as well as the need for increased defence, is pushing the size of the government sector to a record 28 per cent of GDP.

To fund that, taxes as a share of GDP are running at record highs and further borrowing will be needed to meet the revenue shortfall.

As Deloitte’s Pradeep Philip puts it, most voters can see the importance of paying more to prevent harm in the aged care sector, or helping those on the age pension with rising costs, or the need to up defence and security spending amid greater conflict.

“No one is saying we’ve got to spend less. So we are entering a world where we have to be much more efficient on the expenditure side,” Mr Philip said. “There is an efficiency of public administration agenda we need to develop, but we may need to live with higher expenditures.”

At current spending levels, the bulk of the country’s revenue is reliant on company and income taxes, which account for 75 per cent of Federal revenue compared to 36 per cent in other OECD nations. As boomers retire, more of the tax burden will fall to fewer workers, with bracket creep having to do too much of the work.

EY economist Cherelle Murphy, in releasing a Budget preview, suggested raising the GST to the OECD average of 20 per cent while compensating lower-income households for the uplift. Leaving the current exemptions on would generate $80 billion a year, while removing them would add $132 billion.

Other options Murphy suggests are cutting the corporate tax rate or targeting sectors with high value potential and offering steep tax discounts for investing in R&D.

Simplifying the tax burden is one way the country can cast off some of the red tape that has contributed to the lamentable rate of productivity over the past decade. Murphy cites the 2021 Intergenerational Report, which found that if productivity growth rose to its 30-year long-run average of 1.5 per cent, it would boost GDP to such an extent the structural budget deficit would eventually rectify.

Deloitte’s Philip agrees.

“We’re putting too much pressure on incomes, so we need to make a tax mix switch. We need to think about more stable and efficient tax bases, which is why we need another important stage of tax reform,” he said.

These are the sort of big-thinking reforms that have been killed as an election gambit, which means the small target, consumer-focused handouts will be the main feature of the budget — and the reply.

Will it inspire voters? Probably not — and in an uncertain world, who’d take the risk of putting forward a radical plan?