Australian Treasurer Jim Chalmers faces a challenging task as he prepares to hand down his second budget on Tuesday, balancing cost-of-living relief while trying to avoid further fueling inflation.
(Bloomberg) — Australian Treasurer Jim Chalmers faces a challenging task as he prepares to hand down his second budget on Tuesday, balancing cost-of-living relief while trying to avoid further fueling inflation.
An immediate focus of financial markets at the May 9 report will be on a smaller bond issuance projection for fiscal 2024 given a rapidly narrowing deficit borne of high commodity prices and low unemployment.
“The much stronger starting point for the budget will temper the far more somber medium-term picture,” said Su-Lin Ong, chief economist at Royal Bank of Canada who previously worked at Treasury. “This budget is likely to be somewhat underwhelming on the reform and revenue front.”
Here are five items to keep an eye out for at 7:30 pm in Sydney on Tuesday when the budget is released:
Surplus or deficit?
Australia’s budget position has improved significantly over the past year, thanks to a stronger economy, reinforced by the lowest unemployment in about 50 years and higher commodity prices. Official figures in March showed that on a 12-month rolling basis the budget posted an underlying cash surplus.
“Given concerns about elevated inflation and rising public debt, we expect the treasurer to mostly bank a large near-term net revenue windfall,” Goldman Sachs Group Inc. said in a research note, predicting a small budget surplus.
However, bringing the books back into the black for the first time in 15 years is likely to represent a one-off rather than a trend. Goldman, and most other budget observers, predict a return to deficits over the forward estimates, albeit smaller than previously projected.
Gas Tax
Chalmers is examining potential changes to the Petroleum Resource Rent Tax to boost revenue from the hugely profitable energy industry. He received a copy of a Treasury review of the PRRT in April.
The PRRT has faced criticism as producers are able to offset tax payments even as they report record profits. Chalmers hasn’t indicated either way whether the changes will be announced in this budget.
Other Measures
With long-term budget pressures also intensifying from health and social expenditure, all eyes will be on how Chalmers plans to boost revenue or cut costs to prevent spending from spiraling out of control.
Apart from the potential increase in the gas tax take, no other major revenue raising measures have been foreshadowed, though faster population growth and elevated inflation will likely bring revenue upgrades. High inflation revives “bracket creep,” where wage increases to help offset price growth push workers into higher tax brackets with no rise in their purchasing power.
Many economists and former senior officials have urged the government to overhaul Australia’s tax system, which has been described as no longer fit for purpose and too reliant on income tax. Chalmers has signaled that he is keen to be a reformist treasurer, but as he approaches his first year in office, there has been little action when it comes to revenue raising.
Cost-of-living Aid
Economists expect targeted cost-of-living support will be the flagship policy of this budget. Among foreshadowed changes are increased unemployment benefits for people over age 55, a boost to the allowance for single parents, energy cost relief and increased support for childcare payments.
The government is also likely to proceed with previously legislated income tax cuts that are due to begin on July 1, 2024, even though they will further erode the revenue base. But in an environment of bracket creep, they become more significant.
Measuring What Matters
Chalmers will release a “Measuring What Matters” statement focusing on environmental and social indicators such as social mobility, job quality and satisfaction as well as participation by traditionally disadvantaged cohorts.
The government is under increasing pressure from community groups, religious organizations and even its own lawmakers to increase the rate of unemployment payments, calls which will only grow louder if Chalmers delivers a surplus next week.
“The statement is likely to provide clues on longer term policy shifts and priorities that could be reflected in future budgets,” said Adelaide Timbrell, senior economist at ANZ Bank.
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