The mounting burden of healthcare, defense, and welfare costs will constrain government finances over the long term
The Labor government has made clear that it will prioritize fiscal discipline over expansionary policies over the course of its tenure. So far, infrastructure has been the main area where funding for new projects has been delayed or scrapped altogether, but more sectors are likely to face similar treatment. Along with constraining spending, Canberra will try to improve taxation revenues by strengthening its tax avoidance task force, limiting the amount of debt-related deductions that MNCs can claim, and requiring greater financial transparency from businesses.
In the nearer term, the budget provides no relief to households struggling with inflation. Moreover, policies that were in place for most of the year, such as the fuel tax relief and the low- and medium-income tax offset, have not been extended. With the budget stating that energy prices will rise by over 50% in 2022–2023 and the fact that high interest rates will be in place over the medium term, low- to middle-income households will continue to be squeezed and are expected to lower their discretionary spending in 2023.
Overview
Australia’s ruling Labor party updated the 2022–2023 federal budget in October. The budget focuses on returning to fiscal discipline and ensuring the health of government finances over the long term. To that end, the budget cuts AUD 22 billion in spending over the next four years and aims to more efficiently allocate government funds. Treasurer Jim Chalmers has also confirmed that his team will keep looking for areas to reduce spending and cut waste in future budgets, as rising costs associated with welfare payments, healthcare, national defense, and interest on public debt will continue to strain government finances.
Aside from the move toward fiscal discipline, most of the changes made to the budget were in line with the Labor party’s campaign promises made before the election. Childcare subsidies, investments in renewable energy and upgrading Australia’s electricity grid, and environmental protection were the key priorities. Funding for the Australian Tax Office was also increased by AUD 200 million to tackle tax avoidance by multinationals. To make room for these expenses, several infrastructure projects promised by the Coalition government in March, particularly new water works and dams, were scrapped. Most strikingly, however, the budget did not include further cost-of-living support to households despite soaring levels of inflation. This decision was likely made to prevent government support schemes from further contributing to inflation. Finally, the most contentious subject of this budget, the stage three tax cuts, remained firmly in place.
Our View
The budget passed by the previous Coalition government in March was a budget drafted by an incumbent desperate to win an election, with several programs to protect voters’ wallets and superfluous infrastructure projects put together at the last minute. It is no surprise that the ruling Labor party trimmed the fat from that budget and reoriented it toward their own campaign promises. Moreover, the move toward a moderation in government spending was also expected after the various support measures offered during the pandemic led to a rapid expansion of public debt. What is surprising, however, is how Labor has positioned itself as a fiscally responsible government that will continue to cut needless spending and restore the health of government finances. This puts the Labor government in a difficult position moving forward, as its main campaign promises of transitioning toward renewable energy, promoting sustainable materials, upgrading the electricity grid, and energizing the nation’s manufacturing sector will require large investments. Balancing these two objectives will only become more challenging moving forward.
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