BUDGET 23-24: fiscal policy is (still) back

Fiscal policy is back – or rather, still back.

The pandemic unleashed fiscal policy as a much more active arm of economic policy. That unbridling occurred globally; equally global is governments continuing with front-footed fiscal policy approaches.

That is the first takeaway of this budget. The budget remains very important at a macroeconomic level; as much as it has always been important at an individual level.

Beyond 2020’s pandemic-related exceptionalism, budget payments as a share of gross domestic product (GDP) are expected to be higher over every year of the forward estimates than at any time since the mid-1980s. By 2033/34 receipts as a share of GDP are projected to be the highest since at least 1978.

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The inflation challenge can be seen clearly in the budget. The $A14.6 billon in household support is the largest package of spending.

In Australia’s $A2 trillion economy, this won’t make the inflation challenge materially worse. But equally the budget is $A126 billion better off since October from stronger revenue, with lower interest payments on government debt also helping, and only a modest portion of that is being spent. The Reserve Bank of Australia, in ANZ Research’s view, still has a task in front of it to get inflation back within its target band.

Many will talk about ageing, caring and defence as among the main medium-term fiscal pressures. In a narrow sense they are right. The over-80s population rose quite reliably by around 25,000 people a year over the past two decades. Within four years that increase will be around 65,000 people a year.

This budget continues the previous practice of separately identifying climate-related expenditure. The October budget set the benchmark with $A24.9 billion in expenditure, with this budget only adding $A4.6 billion. While the government has also signalled its intention to issue green bonds over the next year, the countdown clock to 2030 is ticking.

Missing from the list of medium-term challenges is China. Adjusting to a slower-growing China and challenging global investment landscape will require flexibility. It will require an economy that is productive and can pivot.

In a service-driven economy, the productivity challenges are particularly complex. This budget does have some focus on the tech and digital transformation agendas. Beyond that though, the first, in many ways unwritten, rule of improved economic performance is use what you have most effectively.

The childcare subsidy program and increased financial support for single parents are additional steps in this direction, and this budget also continues the recent trend of ‘women’s budget’ statements. In fact, in March female participation, employment, share of hours worked and share of full-time jobs all hit records.

Inflation, aging, defence, caring, climate change, China and productivity. Keep the second Tuesday in May highlighted in your diary - it’s not getting dull anytime soon.