Responsible balance between budget repair and spending

The Treasurer hasn’t disappointed, delivering as expected a dramatically improved budget position. 

Compared to the government’s forecasts in December which pointed to total deficits of $340 billion over the four-year period to 2024/25, this figure has dropped to $261bn – even with $35bn in additional spending. 

That means the combined deficits over the four years improved by $114bn excluding new spending – driven predominantly by the much stronger than expected economy and higher commodity prices. 

While it is a big improvement, it must be remembered that the deficits are still huge. 

Even four years out in 2024/25, we're still talking about a $47bn deficit – a level the likes of which we didn’t see even during the global financial crisis. 
 

As for the amount allocated to new spending, $35bn, this represents around one third of the improvement. 

To put this in perspective, in the 2019 budget, the government’s spending over the four years was half a per cent of GDP. The next two budgets, which aimed to cushion the economy from the biggest shock since the Great Depression, saw spending jump to 5.5 per cent of GDP in 2020 and 4.1 per cent in 2021. 

In this budget, which has been brought down just weeks from a federal election, spending across the full 5 years of projections represents 1.7 per cent of GDP – or three times the spending we saw announced in 2019. 

When compared to other pre-election budgets in the past when the government has been well behind on the opinion polls, this level of spending is a lot less aggressive, but certainly not the very cautious position we saw in 2019. This is a commendable decision, given the government is behind in the opinion polls.

Of course, the government may also be holding back some capacity to spend during the election campaign given there was $16bn included in the budget update without a specified purpose.

So where is the spending being directed?

Probably the most anticipated category has been the package to address rising cost of living pressures.

The package unveiled includes a $250 payment for eligible Australian pensioners, welfare recipients, veterans and concession card holders paid before the election. The fuel excise will be halved for 6 months, by 22 cents a litre; and there's more subsidies for the Pharmaceutical Benefits Scheme to make medicines cheaper.

There’s also a $420 cost of living tax offset for low- and middle-income earners.

This is an interesting one as it will effectively give this cohort of earners a double tax benefit, when added to the lower middle income tax offset (LMITO). Originally introduced as a temporary measure in 2019/20, the LMITO – a maximum of $1080 lump sum for those earning between $48,000 and $90,000 – had been extended in the last two budgets. The government decided not to extend the LMITO into July 2023.

This seems to be filling the hole between now and when the big tax reform is coming – the stage 3 tax cuts from July 2024.

These reforms will see the same tax rate of 30 per cent for income earned between $45,000 and $200,000, eliminating the 37 per cent bracket, and raising the 45 per cent lower threshold from $180,000 to $200,000.

That's the greatest tax reform we've had since the GST.

Among the other categories of spending – including education and defence and national security – the government’s jobs mantra also remained firm in this budget.

The apprenticeship wage subsidy scheme has been refreshed and renamed from 1 July 2022 at a cost of $2.8 billion, and $2.7bn will go into national skills reform to support 800,000 training places pending agreement with the states. While, for small business, a $120 tax deduction for every $100 spent on training will be made available, up to $100,000.

I was also pleased that some visa costs have been lowered and country caps for work and holiday visas will be raised by 30 per cent in 2022/23. That is a start but much more needs to be done to attract much needed skilled workers to ease our labour shortages.

Addressing the skills shortage through these initiatives will be vital to meet the additional $17.9bn worth of infrastructure projects earmarked in the budget, adding to the ten-year pipeline, which has gone up from $100bn to $120bn.

All these measures point to the government’s shift in policy focus, from supporting demand – the priority being to cushion the economic blow from the pandemic and get unemployment down – to supporting supply by boosting participation in the workforce and increasing productivity.

The government’s measured stimulus program is to be applauded, striking a responsible balance between fiscal repair and new policy initiatives, as they head to the polls.

We do not believe that this stimulus program will sway the Reserve Bank away from its current plans to remain patient with respect to interest rates.

Despite the uncertainties in the global economy – including the geopolitical upheavals from the Russian conflict in Ukraine and lingering uncertainty about the pandemic and the downside risks posed by a likely lift in Omicron cases over winter – the improvement in the budget bottom is sustainable.

Indeed, on balance, we believe it’s likely the budget forecasts will see another, material upgrade.

Read more of Westpac's analysis of the Federal Budget. 

_{The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.}