The budget

The budget process and the Grattan Institute’s proposals

Unless there are severe economic disruptions, the Commonwealth budget is pretty well settled by early February. Those wanting to influence the government should make their cases by around September-October, when the Expenditure Review Committee of cabinet is considering expenditure and revenue proposals. (The Parliamentary Budget Office has a detailed description of the budget process.)

Nevertheless in the weeks just before the budget interest groups come forward with their wish lists. Perhaps they do this because it’s a good time to put forward ideas and proposals when there is a heightened awareness of economic and fiscal policy. If some of their proposals are in the budget, lobby groups can claim credit, and even if they aren’t they can tell their constituencies that they tried.

In fact the pitch in many proposals is not so much to the government, as to the opposition and to others in Parliament who are more flexible in their approaches to economic management. This is particularly important when in just a few weeks we are likely to have a minority government.

It is in this context that one should read the Grattan Institute’s Orange Book 2025: policy priorities for the federal government. It introduces itself as a pre-election document rather than as a pre-budget document:

Elections are our opportunity to set Australia’s path. This report charts the path to a more prosperous Australia: the policies that should be on the agenda of whoever wins the 2025 federal election.

It presents an agenda for reform in its “menu of measures to build a more prosperous Australia”. Under each of nine priorities it presents objectives for reform, some “quick wins” – essentially tweaks to existing policies – and ways the government can prepare the ground for more enduring and far-reaching policy reform.

For example, under the heading “energy reform” it calls for a “post-coal” structure of the National Electricity Market (as well as other reforms). That requires immediate measures relating to gas prices and supply, while the longer-term priority relates to shaping the Integrated System Plan, and to shifting the electricity market to one with a demand (consumer) focus rather than a supply focus. This is in the broader context of developing a net-zero economy, which will involve an “economy-wide, enduring carbon price framework”.

It is much more than a wish-list. It includes a thorough stocktake of the Australian economy, summarized in a table “International scorecard for economic development and living standards” where Australia is compared with other “developed” countries on 10 dimensions of economic wellbeing. We score well on life expectancy, for example, but comparatively poorly on inflation – probably a reflection of a weak economic structure.

As an aside, perhaps the most informative aspect of this table is the atrocious performance of the US on eight of the ten dimensions. That helps us understand the malaise that projected Trump to office, and it demonstrates the accumulated consequences of decades of public policy grounded in neoliberalism and a “small government” philosophy.

Anyone who believes the Coalition has a realistic energy policy would do well to read Grattan’s section on energy. It does not take an anti-nuclear stance: “It is theoretically possible that nuclear energy, in the form of small modular reactors, could play this role in the 2040s”, but so far such reactors are nowhere near cost-competitiveness. The main shortfall in the Coalition’s policy is that it vastly under-estimates the necessary growth in demand for electricity. That growth in demand can be met with wind, solar, storage, and a small firming role played by hydro and gas. It’s not that nuclear is “bad”. Rather it’s that nuclear is expensive and we don’t need it.

Why this budget is a tricky one

David Speers covers the usual pre-budget speculation in his post The treasurer knows uncertainty is the only sure thing as budget day nears, but for once that cliché about uncertainty has more meaning than usual. No one has the first idea about Trump’s next moves on tariffs, or if these moves will even be on tariffs – there are many other ways he can mess with the world order. Russia and Israel may or may not agree to ceasefires. There are pressures to increase defence spending, coming from supporters of the US alliance and from those who say we should abandon it. Domestically the Reserve Bank may or may not cut interest rates a week after the budget. The Australian Energy Regulator may stick to its proposal to raise electricity prices by up to 8.9 percent. The full effects of Cyclone Alfred are yet to be assessed.

At the same time there are fiscal hawks warning that the budget has a long-term structural deficit: that is, there is no plan to bring the budget back to balance, as if that is an undisputed objective. Those on the right suggest that the government needs to rein in spending, but they never say where, and they never acknowledge that Australia already has a small public sector in comparison with other “developed” countries.

The more reasonable demands are for tax reform to making our taxation system fairer and to collect more revenue. That should have been on the agenda of a budget presented by a re-elected Labor government, but it won’t be on the agenda for a pre-election budget. (The Coalition has once against voiced its idea of limiting federal taxes to 23.9 percent of GDP – an arbitrary figure, even though current and projected taxes are already well below that level.)

The e61 Institute, in association with the University of New South Wales, rather than presenting a specific set of reforms like the Grattan Institute, has listed A set of five economic themes that will dominate the next Parliament in a world economic environment “that may not be favourable to Australia”. These are:

  1. Negotiating a new global order;
  2. Re-examining a high population growth model;
  3. Boosting productivity growth;
  4. Restoring fiscal sustainability;
  5. Achieving a sustainable intergenerational bargain.

A theme underlying these proposals is that public policy should be directed to strengthening our economy domestically, rather than relying on high population growth and on high commodity prices to provide public revenue and to keep the economy growing.

OECD forecasts for economic growth and inflation

Book

The budget’s main document, Budget Paper 1: Budget strategy and outlook, will have projections and forecasts of growth, inflation, wages and unemployment.

Just this week the OECD published its Interim Economic Outlook, revising forecasts for world growth downwards and forecasts for inflation upwards.

For Australia growth is expected to be 1.9 percent this year. That’s unchanged from earlier forecasts, but it has revised its forecast for 2026 downwards by a significant amount, from 2.5 percent to 1.7 percent. That implies we would be facing another year with close to zero per-capita growth. Its inflation forecast is revised upwards for this year and significantly downwards next year, with both estimates falling within the RBA two to three percent comfort zone.

These OECD forecasts, compared with the most recent Australian Treasury forecasts from December’s Mid Year Economic and Fiscal Outlook, are shown in the table below. The forecasts are not entirely independent: our Treasury would have provided its estimates to the OECD, which would have used them as an input to its own forecast.

Probably a table

It’s not clear why the OECD is forecasting such slow economic growth for Australia. Maybe that’s because of our dependence on China, Japan and Korea, but it has not downgraded their growth prospects significantly: in fact it has a small upward adjustment for China.

Or maybe it is taking into account the risk that we might elect a Coalition government.

A user’s guide to the budget

There is a webpage https://budget.gov.au which so far gives nothing other than a countdown in days, hours, minutes and seconds to 730 pm on Tuesday 25 March, when it will have links to all the budget papers. In itself that tells us something about the way the budget is overrated.

In fact the budget is simply an act of Parliament authorizing the government to spend money for specific purposes. Strictly the budget does not include any proposals for revenue (Modern Monetary Theory enthusiasts should approve of this separation), but in practice governments include revenue proposals with the budget.

The budget is often held up as the government’s prime economic policy, but that’s to overrate it: it’s a fiscaldocument. That is, it’s something as mundane as working out how you are going to be able to make ends meet over the coming year. (The Germans use the name Haushalt to describe the budget.) The government influences the country’s economic fortunes through policies on immigration, energy, education and in almost all other government activities, for which expenditure plays only a facilitating role.

With those reservations in mind, below is advice on how to follow the budget, developed from guidance to public finance students: