Federal Budget: The Five Black Holes

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The situation has become more urgent due to the burst of inflationary pressures that started last year, fueled in part by easy fiscal and monetary policy. Central banks, including the Reserve Bank, are now raising interest rates at their fastest pace in decades.

In March, then-Treasurer Josh Frydenberg predicted a deficit of $78 billion this financial year, after a deficit of $79.8 billion in 2021-22.

High commodity prices, inflation, strong job growth and a delay in some spending have improved last year’s bottom line by about $50 billion. Some experts have used these figures to suggest that the country’s budget pressures are easing.

Expensive iron ore and other commodities have helped the budget, but those prices may not remain elevated.

Expensive iron ore and other commodities have helped the budget, but those prices may not remain elevated.Credit:Bloomberg

But a deficit of about $30 billion, which is likely to be confirmed this week, would still be among the 10 biggest deficits in Australian financial history.

And the reduction in the deficit has been driven by unusually high prices for a handful of key commodities. As previous treasurers have discovered, commodity prices can go up both ways and down.

Reserve Bank Governor Philip Lowe noted this month that it was beyond strange that Australia, enjoying record low unemployment and record high prices for key commodities, was still running a significant deficit.

The fastest growing cost of the budget is the interest bill on the federal debt.

In the March budget, the national interest bill was set to reach $17.9 billion this fiscal year. By 2025-26, the Parliamentary Budget Office says it will hit $26.3 billion.

That’s an increase of $8.4 billion or 47 percent in four years.

That dwarfs the jump in the NDIS (22.4 per cent), health (13 per cent), aged care (18.9 per cent) and defense (16.4 per cent).

By 2025-26, interest on federal debt will cost taxpayers more than what is spent on childcare subsidies and financial support for carers

RBA Governor Philip Lowe has noted that despite high commodity prices and low unemployment, the budget is still deep in the red.

RBA Governor Philip Lowe has noted that despite high commodity prices and low unemployment, the budget is still deep in the red.Credit:Alex Ellinghausen

And that is based on rates as they were predicted in early March. Interest costs have risen significantly since then and next month’s Budget is likely to reveal a sharp boost.

That’s just the interest rate equation Chalmers and Gallagher face. The issues that Philip Lowe touched on in his speech – that taxpayers want an increasing number of high quality services – are another.

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Every budget comes with a set of promotional booklets known to budget watchers as “glossies”.

These are used by the government to provide an easy-to-understand overview of the budget. They usually include panels outlining key spending and savings initiatives.

Treasurers Costello, Swan, Hockey and Morrison all outlined both the big spending and the big cuts in their “budget summary”. Frydenberg followed that tradition in his 2019 pre-election budget, which outlined $2.6 billion in savings ($2.1 billion of which came from a single measure, changing the Social Security income assessment model).

But the austerity measures disappeared in Frydenberg’s 2020 COVID budget. They did not return in 2021 amid the uncertainty the pandemic still caused.

And they were not in Frydenberg’s pre-election budget in March this year.

Repairing the budget is politically charged at the best of times.

Doing so after more than two years without significant spending cuts is even more difficult.

Doing so amid difficult domestic and global economic conditions that require the most aggressive tightening of monetary policy in decades puts it into political impossibility.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up for our weekly Inside Politics newsletter here.

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