Jim Chalmers says spending restraint in the face of skyrocketing inflation has defined the Albanese government’s first budget, as the country faces a “complex combination” of economic pressures that pose further risks to households.
Delivering the first Labor budget in almost a decade on Tuesday, the treasurer also flagged the need for tax reform in this term of government to be able to put the budget on a more sustainable footing as spending pressures mount and government debt and deficits worsen across the forward estimates.
Chalmers also signalled more government intervention in the energy sector, saying he is “worried” about gas and electricity price rises of up to 30% next year.
The budget contains few new commitments beyond those promised before the election, with a housing policy that aims to boost supply by a million homes by 2030 the headline announcement, backed by $350m in new funding.
It also delivers on Labor’s key election promises, allocating $7.5bn for childcare reforms, aged care, cheaper medicines and expanding paid parental leave.
Chalmers said with inflation tipped to be higher and more persistent than previously forecast, the government had put a premium on spending restraint to ensure it did not add to pressures already faced by households.
“Restraint is the name of the game in this budget, restraint is what defines this budget, and what differentiates it from March and from recent budgets under our predecessors,” he said.
Amid a “highly uncertain” global economic outlook that poses the risk of a further downturn in Australia, the treasurer said he had resisted calls for cash handouts to help people deal with cost-of-living concerns, saying he did not want to make the problem worse.
“The message I have for Australians all around the country is that the worst thing that we could do is to contribute to even higher inflation. We don’t want cost of living relief to be counterproductive.”
While confining its cost-of-living measures mostly to those promised before the election – with the most expensive being the government’s childcare reforms – Chalmers said the government was looking to do more to combat rising energy prices, with the budget forecasting retail electricity price rises of 20% this year and 30% in 2023-24.
“I’m not going to pretend that we’re not worried about these electricity price forecasts,” Chalmers said. “I think any responsible government facing these kinds of price hikes for electricity and for gas needs to consider a broader suite of regulatory interventions than they might have considered in years gone by.”
In an attempt to limit the budget’s impact on inflation, the government has returned 99% of the increase in tax revenues to the budget over the next two years and offset most of its policy decisions in that timeframe. In contrast, Chalmers said, the seven budgets between the mid-year budget update in 2013-14 and the March budget had returned an average of 40%.
The budget’s key new measure is an affordable housing accord signed with industry and the states, with an “aspirational target” to build 1m new homes in five years from 2024 that would target areas of low vacancy and high rents.
Details are yet to be fleshed out with institutional investors, with work to be pursued by a newly formed “round table” of representatives from the superannuation and banking sector.
Savings of $22bn have been found across the forward estimates, with the largest of these – $6.5bn – coming from “reprofiling” of infrastructure spending promised by the former government.
The government’s budget repair task has also been boosted by a revenue boom coming from soaring commodity prices and a strong labour market, which has delivered a $41.1bn improvement to the budget bottom line in 2022-23, and a $12.5bn improvement next year. Cumulative deficits over the forward estimates now total $181bn, compared with the $224.7bn forecast before the election.
But from 2024-25 as commodity prices decline, the deficits are worse than previously forecast, peaking at 2% of GDP in 2024-25 to be $51.3bn, and at $49.6bn in 2025-26. This is $11bn worse than forecast in March.
Chalmers said the government had demonstrated it was prepared to take “difficult decisions in difficult times” but there remained a bigger job ahead to put the budget on a more sustainable footing given the worsening outlook.
He said the task could not wait until after the next election: “I don’t think that that work can wait for another three or four budgets, it has been neglected for too long, and so we do hope to lead a conversation this term about how we get this budget on a more sustainable footing.”
The spending pressures include interest payments on government debt which are growing at 14.4% annually, followed by a 13.8% annual increase on national disability insurance scheme spending, and 6.5% for hospital spending.
Despite the government ruling out tweaks to the stage-three tax cuts in this budget, Chalmers said he believed the “national conversation” about how to fund the services that Australians expected needed to canvass the possibility of changes to the tax system.
“What we’ve done in this budget is we’ve built the foundation of a more sustainable budget but there’s more work to do, and that will involve ongoing spending restraint, it will involve trimming spending where we can, targeting investments, and also tax reform,” he said.
The government’s post-election budget paints a grim picture of the economic outlook, with warnings there could be a sharper slowdown in domestic activity that could place further pressures on households.
Growth has already been downgraded by one percentage point to 1.5% next year, and down 0.25% this year to 3.25%.
Globally, key risks include recession across major advanced economies, a sharper-than-expected downturn in China, a sudden tightening in financial markets and further energy price shocks stemming from the Russian invasion of Ukraine.
These risks could drive inflation even higher than the 5.75% forecast for 2022-23, with inflation set to peak at 7.75% in the December quarter this year.
The budget papers also point to the uncertainty linked to the floods, future interest rate rises and household responses to inflation as key risks to economic activity.
“Higher-than-expected inflation may further constrain consumer spending by lowering real incomes, while a potentially weaker economic outlook could see households exhibit precautionary savings behaviour that further weighs on consumption,” they say.
They also say low-income households are expected to be more heavily affected by the high-inflation environment, as essentials such as housing costs and energy make up a larger share of their household expenses.
Wages are not expected to outpace inflation until 2023-24, when they are forecast to grow 3.75% compared with the consumer price index of 3.5%, at the same time as unemployment jumps from 3.75% to 4.5%.
The opposition’s treasury spokesman, Angus Taylor, accused the government of breaking an election promise to reduce power bills by $275, and said the budget would not help ease cost of living concerns.
“The real test … was whether Labor was going to deal with the cost of living pressures Australians are facing,” Taylor told the ABC.
“It’s very clear that if you are a typical Australian household, you are not going to see any improvement between now and Christmas.”
