What a difference seven months makes.
A surge in tax collections has provided space for the Government to help out the most vulnerable and move towards a surplus for 2022-23, while forecasting much healthier cash balances over the coming four years.
Almost $30 billion of this surge has come from additional company tax collections, but business didn’t get much in return.
The Government is still occupying too much of the economy’s capacity and risking contributing to inflationary pressures.
Business now needs fiscal discipline to ensure inflation isn’t higher than it needs to be, while resources are free to be used for their most efficient purpose, especially as we head into a period of slower economic growth.
The Government plans to spend more than it saved in the short term. While this will lower the out-of-pocket costs for some households by directly helping with their electricity, medicine and health bills, it will still add to aggregate demand. The pay rises for aged care workers, subsidies for energy efficient homes and higher welfare payments will boost consumer spending.
In normal times the economy would easily absorb this stimulus.
But inflation is already running at an annual rate of 7 per cent and more than one in every four dollars spent in the Australian economy is by a state, territory, local or federal government. The Budget measures in themselves won’t trigger a rate hike, but the Reserve Bank will need to consider the additional spending in its inflation view.
With the focus firmly on helping the household sector given the rising cost of living, the productivity enhancing reforms that would in themselves ensure the Budget remains on a good long-term footing were absent.
Encouragingly, this Budget did introduce some new policies to add to the skills base of the economy, including an important measure to boost the childcare workforce. There were measures to encourage hydrogen production at the start-up phase, enabling business to leverage cost competitive renewable energy.
Equally encouraging were policy adjustments that have narrowed the structural budget deficit from around 2 per cent of GDP per year at the last budget update, to less than 1 per cent of GDP by 2024-25.
That puts the budget in a more sustainable position. But deeper cuts to spending and braver revenue raising measures would have enabled the Government to pay off debt faster, invest more in sustainable, inclusive pro-growth policies while also rebuilding the fiscal buffer needed to protect the economy from future emergencies.