Treasury officials have been scrambling over the past two weeks to pull together the 2024-25 budget – one that Jim Chalmers was not planning to deliver.
Two weeks ago, the government had hoped to call an earlier April election, but ex-Tropical Cyclone Alfred blew that away.
The upshot: a budget on Tuesday and a May election to be announced – potentially – days later.
So, what do we know so far?
We know that the deficit in this financial year won’t be too far below the $26.9bn predicted in December’s mid-year fiscal update.
Chalmers is quick to laud Labor’s back-to-back surpluses, but we know those halcyon days are over. Instead, Treasury will be forecasting a decade of deficits.
We can expect another round of energy rebates – Chalmers has said there will be “substantial” cost-of-living support – but otherwise the government is hoping to keep its powder dry for some vote-winning campaign announcements.
That means there could be some extra billions in provisions squirrelled away in an election war chest – otherwise known as “decisions taken but not yet announced”.
There are still many questions about what will be in Tuesday’s budget: who will be the winners and losers? Will it boost or bomb Labor’s election hopes? Will there be any surprise announcements?
But let’s ask a more basic budget 101 question.
The federal government collects and spends hundreds of billions of dollars a year – where does it all come from, and where does it go?
Where the money comes from
The federal government collected $650bn in taxes, excises and customs in 2022-23, and this is expected to have climbed closer to $700bn in this financial year.
The largest share of the tax collected in 2022-23 came from income tax on workers, at 40%. The next biggest single contributor is company income tax at about 20%. Sales taxes (predominately GST) account for just over 10% of commonwealth revenue.
The tax mix (which here includes state revenue) has changed over time, and it continues to do so – not always for the better.
The Parliamentary Budget Office splits the history of our tax mix in phases going back to 1900. From the 1960s and 1970s, we became increasingly reliant on taxing individual incomes to fund the budget.
The governments of the day achieved this via bracket creep. As workers’ incomes increase, their average tax rates rise. If the marginal tax thresholds are not adjusted, an increasing share of the average worker’s wage goes to tax.
Theoretically and taken to its extreme, if income thresholds were never adjusted up, we would eventually all be in the highest tax bracket.
Over-reliance on income tax is a hot topic, particularly as formerly lucrative excises on petrol dwindle as we move to electric vehicles, and with the tobacco excise falling foul of an exploding hidden market for cigarettes and the surging popularity of vapes.
Without adjusting thresholds, the share of tax coming from individual income tax could climb from 40% now to nearly 46% by the mid-2030s, according to the PBO.
The government needs that revenue to balance the budget. It’s that bracket creep that will get us back into the black in a decade’s time. If we were to return all that bracket creep (by adjusting thresholds to wages growth), the deficit would continue to grow.
Of course, governments do occasionally adjust tax thresholds – we saw that with the three-stage income tax reforms begun by the previous Coalition government, and finished (in slightly more equitable terms) under Labor. But will they be in a position to do so again any time soon?
Where the money goes
Looking at estimated spending for 2023-24 in the last budget, 37% is dedicated to social security and welfare expenses. We’ll have a closer look at this area below.
Health spending is the next biggest at more than 15%, and payments to states and territories – which includes GST disbursements.
(The commonwealth collects GST on behalf of the states and territories and then reimburses according to a complex calculation that, in part, tries to ensure jurisdictions less capable of raising revenue get a bigger share of the pie).
Defence is closer to 7% of total spending, just pipped by education. Paying interest on the national debt is a growing and unwelcome expense, at 3.3% of total spending.
The PBO offers another useful insight into how social welfare spending patterns have evolved.
As the chart shows, spending on disability support – measured as a share of the economy – has jumped thanks to the strong growth in the NDIS. Expect the growth rate of this program to again be a hot topic of conversation on budget night and in the days that follow.
It’s no surprise that as Australia’s population ages, assistance to older people has only gone one way – up. In contrast, spending on medical and pharmaceutical benefits as a share of GDP has steadied this century, and assistance to families and children has fallen substantially.
Unemployment benefits spiked in the 1980s and 90s – not least because of recession and double-digit rates of unemployment – and in the 2000s has started to drift higher from a much lower base.
