Australia gears up for ‘defining decade’ with rare budget surplus

Australia’s treasurer Jim Chalmers got scant praise from political opponents this month for delivering the country’s first budget surplus in 15 years. A “drover’s dog” could have done as good a job, given surging commodity prices and a strong post-pandemic economic rebound, said Angus Taylor, the shadow treasurer.

Chalmers rebutted those taunts, saying he had made “substantial progress in repairing the budget” since his Labor party returned to power after nine years. Australia was now in line for a A$4.2bn (US$2.8bn) surplus for the year, compared with previous estimates of a A$32bn deficit, he said.

Yet, Chalmers admitted that the return to balancing the books would be fleeting, as Australia contends with a mounting bill for defence, welfare and an energy transition in what Labor has said will be “a defining decade” for the country.

Anthony Albanese, the prime minister, has set Labor on a cautious course in its first term in government for a decade and has been keen to dispel the notion that his party is not a good custodian of the budget.

In social policy, Labor has delivered on election promises to increase spending on childcare, single-parent families and care workers. On defence, Labor has maintained its commitment to the Aukus agreement — a trilateral defence partnership with the US and UK built around the delivery of nuclear-powered submarines to Australia — and boosted spending as it firms up regional security ties with allies, including Japan.

Many observers argue, however, that more should be done to reshape Australia’s economy at a time when strong commodity prices are cushioning the cost of the multiple international and domestic challenges, which include the costs of an ageing population and rising debt service payments.

“The terms of trade will be strong for a number of years. But when these conditions normalise then Australia has a lot of problems,” said Peter Costello, chair of the country’s sovereign wealth fund, the Future Fund, and the longest-serving treasurer in Australia’s history.

Australia has enjoyed a broad economic boom for three decades as its commodities — principally iron ore, gas and coal — have underpinned China’s massive infrastructure rollout and Japan and South Korea’s energy needs. But China’s own slowing growth raises questions over how long Australia can sustain its momentum.

Australia’s net debt position — which is due to rise to more than A$700bn by 2027 according to budget estimates — was of particular concern, Costello said. He said it was not sustainable to run a structural deficit of 2 to 3 per cent of GDP and called for more fiscal discipline to get the budget back into shape.

“Overall it’s a good result but I don’t think it’s solved our medium- and long-term problems,” said Costello, who was a Liberal politician.

Danielle Wood, chief executive of the Grattan Institute think-tank, agreed that there was a “pretty stubborn gap” between revenue and spending forecasts in upcoming budget projections, suggesting that more action would need to be taken to address the structural deficit — the gap between projected revenue and expenditure when stripping out the impact of high commodity prices.

Spending on defence, for example, is expected to rise to more than A$50bn for the first time in the 2024 budget year as the country prepares for the advent of nuclear-powered submarines and long-range missiles. Meanwhile, the cost of the country’s disability support scheme is expected to rise from A$35bn to A$56bn in the 2027 budget year. Chalmers has, however, detailed substantial cuts to some defence projects and the scope of the disability scheme to stop costs blowing out even further.

Wood said Labor had exercised political caution in the budget despite riding high in the polls. That reflected the party’s “incrementalist approach” under Albanese and a need to counter accusations from the Liberal party that Labor overspends when it is in charge.

Wood said Australia’s long record of economic growth had made it harder to push through significant reform in areas such as income tax, where Labor has refused to back away from cuts promised to high earners under the previous Liberal regime.

“Australians are not used to hard decisions being made,” she said. “We have been very lucky,” she added, with commodity prices that had “cushioned the blow” of problems including the global financial crisis, the spread of Covid-19 and inflation.

Labor’s reform agenda may have also been constrained by the backdrop of high inflation and a cost of living crisis. Chalmers said his spending measures had been “carefully calibrated” not to fuel a rise in consumer spending at a time when the Reserve Bank of Australia has raised interest rates 11 times in the space of a year.

Gareth Aird, head of Australia economics at bank CBA, said the impact of cost of living increases was being felt particularly among younger people.

“The starting point for the economy is a good one — very low unemployment. But for a lot of households the economy isn’t quite working for them,” he said, pointing to negative wage growth in real terms coupled with rising mortgage rates or sky-high rents.

“I think once inflation has come back to more acceptable levels and the RBA has started to lower rates there will be a greater focus on medium-term reform — or at least there should be.”

Chalmers’ budget message was that he had performed a balancing act with a responsible plan while meeting election promises on welfare without adding to inflation.

But Costello — who in his time as treasurer oversaw 12 budgets including 10 surpluses — suggested Chalmers might already have missed his moment for major budget reform, saying this was always easiest in the first year of government. “From then on it gets harder,” he said.

Source: Economy - ft.com