The Albanese Government has unveiled its first Budget.
The Government announced a budget deficit of $36.9 billion for 2022-23, widening to $44.0 billion in 2023-24, $51 billion in 2024-25 and $50 billion in 2025-26. While the 2022-23 deficit is less than half the $78 billion forecast in the May budget, deficits are still forecast to spiral over the next three years as interest rates rise and economic growth slows.
The Budget papers reveal the economy is expected to grow just 1.5 per cent in 2023-24, down from 3.25 per cent in 2022-23. The unemployment rate is estimated to rise to 4.5 per cent by June 2024 from its current level of 3.5 per cent, a 50-year low. Inflation is forecast to average 5.75 per cent in 2022-23, peaking at 7.75 per cent in the December quarter this year. Inflation will remain above the Reserve Bank’s 2 to 3 per cent band in 2023-24 and only fall within that band in 2024-25.
David Bassanese, BetaShares Chief Economist, rates the Government’s first budget as a “B-”.
“There are admirable elements of the Budget, but also notable shortfalls. Ultimately, the Treasurer’s work shows potential, but he missed what will arguably have been the best time cyclically to address Australia’s chronic budget problems.”
“To keep public debt under control, we must either tax more or spend less in the Federal Budget – last night did little to answer that important question,” Bassanese said.
What is missing most in the Budget is more action on tackling Australia’s growing structural budget deficit gap, he said. “Quite simply, Australia’s ability to offer high Scandinavian-style levels of social welfare with low US-style levels of taxation is coming under strain – given reduced long-term productivity growth, an outdated tax system, the major new commitment to the NDIS, and debt-servicing interest bill falling due after racking up so much debt during the COVID crisis.”
According to Bassanese, spending too much now and not fixing structural deficits could add to upward pressure on interest rates and unemployment. “By waiting, the Treasurer faces a potential budget blowout over the next few years caused by a likely global recession – and attempting to structurally tighten the Budget at that later time would be counter-cyclical, aggravating the upward pressure on unemployment that we are likely to face.”
“Now is arguably the best time to engage in structural budget tightening – not in a few years – especially as this would have taken pressure off the Reserve Bank to lift interest rates too much further.”
Despite the budget blowout, the Federal Government has stuck to the stage three tax cuts for higher income earners. Those tax cuts, effective in July 2024, create a flat tax rate of 30 cents in the dollar for anyone earning between $40,000 and $200,000. But workers will still suffer as inflation eats into pay packets – real wages are only expected to start growing again in 2024 when inflation moderates. Higher electricity prices and rising grocery bills remain significant hits to the income of Australians.
However, Bassanese did welcome some government measures, including increased spending on housing and childcare.
“The Treasurer has found room to honour his main social spending election promises, such as childcare and parental leave. Commendable also is the overdue focus on easing housing affordability problems by focusing on supply measures rather than demand – the latter of which only tend to drive up prices. Of course, the question remains exactly where these homes will be built and whether they will be supported by conveniently-located jobs and infrastructure,” Bassanese said.
In addition to the above, measures announced in the Budget to ensure the integrity and the fairness of the tax system include improvement of the tax system integrity in respect of off-market share buy-backs undertaken by listed companies and an increase in funding to the Australian Taxation Office to extend its compliance programs.
There will also be legislation introduced with a backdated effective date of 1 July 2021 to clarify the tax treatment of digital currency following the decision by El Salvador to adopt bitcoin as legal tender.
Also included with the Budget was a bill introduced to Parliament on 3 August 2022 relating to a superannuation change. If made law, it will reduce the eligibility age for downsizer contributions from 60 to 55 years of age. This will allow eligible Australians to make a one-off contribution of up to $300,000 per person when they sell their family home. The bill is before House of Representatives.
The information provided in this article should not be construed as tax advice by BetaShares. For tax advice specific to your circumstances, we recommend you seek advice from a registered tax agent.
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