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Budget challenge lies in keeping government size in check
In brief
- The structural levels of high government spending are crowding out private sector spending, and not suited to an economy with skills shortages and capacity constraints.
- EY is calling for spending to be cut relative to the current trajectory, and productivity enhancing reforms put to the top of the list.
From the Chief Economist
A significant challenge for the Treasurer in this Budget is balancing the books to absorb election commitments, higher debt servicing costs and emergency flood recovery.
But more immediately, the task is keeping the size of government in check at a time when high inflation is becoming more persistent. In a capacity constrained economy, where capital and labour are hard to find, spending that doesn’t have a productivity dividend will make the Reserve Bank’s job harder. That ultimately could mean higher interest rates than otherwise.
Supportive government measures necessary during the pandemic – such as the purchase of health supplies and vaccines, and additional funding for hospitals – when added to regular commitments and ongoing infrastructure spending, pushed the public sector (federal, state and local) to over 27 per cent of GDP last financial year. That was appropriate in 2020 and 2021, but not this year.
Summary
The challenge that Australia faces is that we don’t just need a bread and butter budget. We need a bread and butter Treasurer firstly focussed on reigning in spending. Through this bread and butter approach, the Treasurer can let the private sector lead growth which then provides space to invest in productivity measures to grow the capacity of the economy.
As we lift our eyes to the May budget, our hope is that the Treasurer will have done the hard work of cutting spending and inflation will have eased, leaving the Government room to get on with its reform agenda.