Budget headlines are like book covers. At best, you’ll get an initial indication of what you’re in for – horror or humour. But you really won’t know what all the fuss is about till you get stuck in to the gory details.
This year, budget is coming early. As with every year, we can expect some government preening about budgetary positions: we are the only ones who could have managed such wonderful numbers in such challenging times.
Then there will be a rebuttal. Whether it’s commentators or the opposition, someone will raise the spectre of debt and deficit. How can you trust a government that has plunged the economy into debt? Surely this is a sign of economic mismanagement.
Both lines are old furphies. Budget headline figures are no more a measure of politicians’ economic savvy than the value of someone’s car is a measure of their ability to drive it.
Why? The majority of government revenue and spending is automatic.
On the revenue side, look no further than taxes. The majority of federal government revenue (around 65% in 2021-22) comes from personal income and company taxes. When wages rise (albeit not fast enough to meet inflation), the government gets more money. This year the government will get windfall tax revenues from mining profits; war against the Ukraine has seen commodity prices boom.
Most of the biggest expenses are also automatic. Aside from transfers to the states, the largest line-items for government are pensions (over $50bn) and Medicare payments ($29bn). Once someone is eligible, payment is guaranteed at a preset amount.
Taxes and welfare payments operate as automatic stabilisers. Taxes cool the economy when it’s running too hot, and welfare payments serve as fuel when the economy is struggling. All of this happens without politicians saying boo.
This doesn’t mean that you shouldn’t care about the budget.
Governments are some of the biggest entities in this country. The commonwealth government employs nearly a quarter of a million people – more than the large supermarket chains. Nearly one in every three dollars is spent by government.
So, while most of government spending (and earning) is automatic, its choices matter. Small changes for government can mean big shifts for businesses and individuals. Think about the impact of changes to funding for various university degrees, or how many people installed solar during the rebate program.
It’s not likely we will see a jobkeeper or NDIS-scale program on the papers this budget night. However, it is unmistakably an election year. While the economy is growing, it’s still getting back on its feet. Cost-of-living pressures are real and growing.
Maybe money can’t buy love, but spending can buy votes – or so politicians hope.
Put these things together and it’s a safe bet that the chequebook will be out. Speculation to date is focused on booze and bowsers. If the whispers are right, cheques will be made out to motorists (cutting or freezing the fuel excise) and beer drinkers (cutting the draught beer excise).
We will also get an important sense of just how big the pre-election promises are likely to be. Each budget contains a line for “contingency reserves”. One part of contingency reserves is “decisions taken but not yet announced”. This is code for new spending that the government has decided on but does not yet want to disclose. The number is reliably largest in the period before an election.
Like an advent calendar, we can expect to be drip-fed goodies once an election is announced.
If you really want to test a government on their economic chops, don’t focus on debt and deficit numbers. Instead, look at what extras they spend on, how and over which period.
At the very least, economic managers should follow good policy process. That means properly evaluating an initiative before it is introduced, and re-evaluating its effectiveness after a set period of time.
Alas, politicians of both stripes have a bad habit of not following the government’s own guidelines – especially when it comes to elections.
Good economic managers will invest in initiatives which support productivity, participation and/or population. They are mindful of externalities (like environmental impacts) and unintended consequences (such as implications for equity) of their ideas.
A good economic manager does not kick the can too far down the road. New spending commitments should be funded, rather than leaving a budget hangover for future governments (or generations) to worry about. Initiatives should have a use-by date, or be set to a fixed cap. We want to avoid dripping taps – particularly until the effectiveness of a policy is proven.
And then there’s great. Great economic managers are leaders. They are the ones who can look past self-interest and the next date in the political timetable. They focus on tackling an ever-growing list of wicked problems.
Decarbonisation, demographic shifts, technology changes, equity and equality to name a few.
That’s what I’ll be hoping for on budget night.
Jessica Mizrahi is an economic consultant and commentator. She has taught, researched and applied economics for over a decade
