The problem with the Labor Government’s first full budget is that it does not provide a credible response to the two major economic challenges that we face.
The first of those challenges is visible to all of us in the shops. With inflation running at seven per cent and wages only going up by just over half that, most of us are getting poorer.
The second is our woeful productivity performance. Our productivity has fallen by 2.5 per cent since Covid-19, and there has not been any significant productivity growth for more than a decade.
The two issues are connected too. The only way we can give people the pay rises needed to catch up with inflation is to do so through higher productivity.
The Government claims that its budget tackles inflation because “Treasury experts” say that it will. These are the same experts who dismissed concerns in early 2021 that post-Covid inflation could be a problem. When I asked Treasury officials at Senate estimates in early 2021 if they were concerned about inflation they said “we’ve got a long way to go to get back to generating wage pressures and inflation”.
Unfortunately for all of us they got it completely wrong.
The claim that this budget is going to help us slay inflation is like saying a Big Mac super size meal will help you lose weight.
The most revealing table in the budget is buried deep on page 94. It tells you how much government actions have increased government spending in net terms. For this week’s budget, the government’s decisions have added $21 billion.
Apart from the coronavirus years, this is the biggest increase in government spending since the Global Financial Crisis.
If Labor says they are serious about fighting inflation, why are they increasing spending at a rate normally only seen in response to a recession? Labor’s extra spending will only add fuel to the cost of living crisis most Australians are experiencing.
This has been the view of most economists since the Budget was delivered. Chris Richardson said that the Budget had “raised the chance that (the Reserve Bank of Australia) will do another swing of the baseball bat.”
BetaShares economist David Bassanese has said about the budget “the second Labor budget under Treasurer Jim Chalmers is unambiguously expansionary”. And, Andrew Boak, the Chief Economist at Goldman Sachs, concluded that after the Budget “we see a firming case for further policy tightening by the RBA over the coming months.”
All of this spending may have some point if it were directed at increasing our productivity. If we produce more that will help reduce the excess money supply that causes inflation without having to increase interest rates. However, the Government’s spending is focused almost entirely on cash handouts rather than building new roads, dams or other infrastructure.
In a budget with record spending, there is a record lack of any infrastructure investment. Nothing for the Bruce Highway, nothing for new dams or rail lines. The Rockhampton Ring Road remains unfunded. The only exception is the Brisbane Olympics. For whatever the merits of the Olympics it will hardly make us more productive.
This is a political budget not an economic one. The Government seems to think throwing out cash as if from a helicopter will be popular. But the real test of this budget will be whether interest rates keep going up because of it. Any future rate rises will be clearly because of the Government’s decision to increase spending by so much.
If, by next year’s budget, people are struggling even more to pay their mortgage, it will be because of this government’s rash and untimely spending splurge. That will be a disaster for our economy, and it also will not play well politically for the Government.
