Date posted: 11/03/2022

Australian Budget will likely defer reform ahead of key poll

While the economy has weathered the coronavirus pandemic better than expected, the government is unlikely to confront complex structural issues until after the election.

In brief

  • The Treasurer will highlight Australia’s economic resilience and the strength of the recovery in the Federal Budget on 29 March
  • Measures to encourage economic growth and shore up the recovery will remain a priority
  • Tough conversations and difficult decisions on tax reform, intergenerational equity and decarbonisation will likely be deferred

Treasurer Josh Frydenberg will highlight Australia’s economic resilience in the face of the global pandemic when he unveils the 2022-23 Federal Budget on 29 March. 

With a federal election due in May, in which the Coalition will seek a fourth term after nine straight years in power, he’ll likely have little appetite to deal with the many complex structural challenges Australia faces, such as tax reform and sustainability, in this Budget, CA ANZ policy experts say.

“We expect a continuation of measures to support the recovery and the health of Australians — the economy still needs fiscal stimulus,” says Susan Franks, CA ANZ Senior Tax Policy Adviser. “But the proximity of the election means it’ll be up to the next government to start the tough conversations and make difficult decisions on tax reform, intergenerational equity and decarbonisation. We can’t keep putting these things off.”

The COVID-19 pandemic forced Australian governments to order border closures and lockdowns for two years, causing unprecedented disruption. Now, with restrictions easing and international borders reopened to vaccinated visitors, the Coalition, which has just a single seat majority in parliament, will be keen to spruik a robust recovery. 

The central bank is sanguine about Australia’s outlook. In a speech in early February, Philip Lowe, the Governor of the Reserve Bank of Australia, said jobs growth was strong and unemployment low, household and business balance sheets were “generally in good shape” and wages growth picking up. The government expects GDP growth of 3.75% in 2022-23. 

But a robust recovery isn’t guaranteed. A slowdown in the rate of vaccination boosters may increase the chance of fresh disruption by coronavirus variants. An increase in inflation globally, as well as the crisis in Ukraine, are added uncertainties. 

The federal government said in December it had committed $337 billion in support to businesses and households since the onset of the pandemic. That’s caused the Budget deficit to swell to an estimated $100 billion in the current financial year. Although the deficit is forecast to decline to $57 billion in 2024-25, spending commitments mean net debt will keep rising to about $1 trillion in the same year.

Returning to business as usual will go only so far to replenishing government coffers, enabling it to reduce the debt and deficit. That’s why new federal initiatives to fix underlying structural issues in the economy to ensure fair, sustainable growth are vital, says Franks, co-author of CA ANZ’s pre-Budget submission to the government. 

The need to reform the tax system, described as “not fit for purpose” by some industry leaders, including former Treasury Secretary Dr Ken Henry and Reserve Bank Board Member Alison Watkins, is widely recognised, says Franks.

We have to be mindful about how we grow, so that we’re focused on long-term, sustainable growth.
Karen McWilliams, CA ANZ Business Reform Leader

Moreover, the COVID pandemic has highlighted policy challenges caused by more rapid digitalisation, with many employees still working from home and a new generation of ‘portfolio’ workers in the gig economy. There’s a raft of issues related to intergenerational equity and a gaping opportunity for effective fiscal policy to encourage rapid decarbonisation of the economy. 

“Productivity has been flat for a long time and as a country we haven’t really come up with a solution for that,” says Franks. In addition, the pandemic has exposed “cracks in the federation” that require redefining federal and state government roles and responsibilities and how they are funded.

Some governments, such as New Zealand’s, are increasingly focusing their budgets less on conventional measures of economic and financial performance and more on the wellbeing of their citizens, says Karen McWilliams, Business Reform Leader. 

“With the pandemic, we’ve seen governments focus on measuring success based on health outcomes, such as the number of deaths and hospitalisations,” McWilliams says. “It’s shown how we have a real opportunity to integrate broader measures of performance into our annual budgets.”

Increasingly, Australia needs to question economic growth as a measure of success on its own, McWilliams says. “It’s challenging, but we have to be mindful about how we grow, so that we’re focused on long-term, sustainable growth and not just growth for growth's sake that risks depleting the world of critical resources for future generations.”

 

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