Here is a concise analysis by John Kehoe, EconomicsEditor of the AFR:
“A $1 trillion debt looms. There will be a price to pay for itTreasurer Jim Chalmers may have delivered a politically clever budget, but he is amassing more on thenational credit card without a plan to pay for it.This pre-election budget pretends to voters they can have it all: tax cuts, near-record governmentspending and no fiscal consequences. Treasurer Jim Chalmers may have delivered a politically cleverbudget because trimming income tax rates for most workers blunts the growing criticism about bracketcreep, which the $536 tax cut from 2027-28 will partly address in the short term. Average workers will beprotected from bracket creep for two years. There is one modest economic reform worth mentioningthat isn’t really a budget item. The government will make it easier for employees to switch to betterpaying jobs by scrapping non-compete clauses for workers earning up to $175,000. This removesburdensome business-imposed red tape and enables labour to flow to higher productivity firms. Itdeserves a tick, but falls far short of the bigger productivity-boosting reforms required to materially liftpeople’s living standards. The reality is Chalmers is amassing more spending on the national credit cardwithout a plan to pay for it. Gross government debt will surpass $1 trillion for the first time next financialyear and the decade-long timetable to return the budget to balance has slipped further.Since the budget update only three months ago, pre-election policy decisions taken by the Albanesegovernment have worsened the budget bottom line by $34.9 billion over four years for initiatives such asmore Medicare bulk billing and energy bill rebates.Chalmers argues about half of this is due to the tax cuts. And it’s less than the $39 billion of policydecisions Liberal predecessor Josh Frydenberg made in his 2022 pre-election budget, which this writercriticised at the time as a budget “splurge” that “should have been better”.Since Labor came to government, discretionary decisions on spending and revenue have worsened thebottom line by $112 billion over the budget’s rolling four years. The spendathon has been masked by anunprecedented revenue boom from soaring personal income tax payments and taxes on corporateprofits due largely to bumper export prices for iron ore, coal and gas. Total budget revenue has beenupgraded by an astounding $392 billion over the budget’s rolling four years. The revenue luck has notbeen matched by spending discipline. Witness the current fiscal year. Nominal spending is up 8.7 percent to $731 billion, at a time when the government was supposedly exhibiting restraint to help theReserve Bank of Australia reduce inflation and interest rates. Under a fairer measure, which discounts forinflation, real spending has expanded 6 per cent in 2024-25.Since the 1990s, this spending growth has typically only been exceeded during the 2020 pandemicstimulus, 2008 global financial crisis and introduction of the goods and services tax in 2000 whencompensation payments were offered to pensioners and welfare recipients. Consequently, federalspending next fiscal year is forecast by Treasury to hit 27 per cent of GDP – the highest, outside of thepandemic, since 1985-86. This is the consequence of Chalmers and Finance Minister Katy Gallagherhaving no real fiscal rules. The government is claiming victory on the $52 billion National DisabilityInsurance Scheme, banking $3.9 billion of savings through to 2028-29. But the 10 per cent growth thisyear is still eye-watering and more work will be required to rein it in. Spending on interest payments onthe looming $1 trillion debt, defence, healthcare, aged care and childcare subsidies are all forecast togrow faster than the economy over the coming years, according to Treasury. That is not sustainablewithout major spending cuts elsewhere or tax rises. Gallagher has claimed this budget makes a mere $2billion in gross savings, but the table of truth in the fiscal document reveals the government is actuallyspending $20.7 billion extra in net terms via policy decisions over the next four years. Consequently, theunderlying cash deficit is projected to be between about $30 billion and $40 billion a year through to2028-29.But even those figures undercook the true state of the books.There is additional so-called “off budget” spending such as $21 billion for the Clean Energy FinanceCorporation, a $16 billion discount on university loans, another $3 billion for the loss-making NBN, $7.1billion for the delayed Snowy Hydro 2.0 project, $12 billion for Housing Australia and $12 billion for theNational Reconstruction Fund. These so-called “investments” will worsen the budget by $103.9 billionover five years and take the total cumulative headline cash deficit to $283.4 billion by 2028-29. And thisall assumes nothing major goes wrong from US President Donald Trump’s trade war that Treasury isgetting nervous about. At some point, there will be a price to be paid by current and/or future taxpayers,when the inevitable budget reckoning arrives.”
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