Budget success is helping the economy

The upcoming Federal Budget will be a testament to the Labor Party's success as economic managers, repairing much of the damage done by the previous Coalition Government. Stephen Koukoulas writes.

THINK BACK to the May 2022 Election and the undoubted response incoming Treasurer Jim Chalmers would have had to the briefing on the economy and the Budget that he received from Treasury Secretary Steven Kennedy.

While obviously delighted for Labor to win the Election and for him to be Treasurer in that new government, Chalmers was handed the proverbial economic and fiscal shit sandwich.

It had the following characteristics:

Booming and overheated GDP growth with both monetary and fiscal policies stimulating the economy further.
As a result of these policy errors, inflation had been unleashed, sparking the inflation-inspired cost of living crisis that Chalmers had to deal with. Indeed, in the March quarter of 2022, the quarterly inflation rate was 2.1% and rising. Like many things in economics, it was a problem that would take some time to fix.
Under the Coalition Government, wage growth had been hovering between 1.3 and 2.4% for seven long years. This pathetically weak wage growth was driving real wages lower and was a factor behind severe weakness in household spending growth.

In terms of the Budget, it was a train wreck that Chalmers and Finance Minister Katy Gallagher had to repair.

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Former Liberal Treasurer Josh Frydenberg delivered his last Budget in March 2022, two months before the Election, with the following economic horror story:

A budget deficit of $80 billion in 2022-23 (a whopping 3.4% of GDP), despite the booming economy, with deficits of $43 to $56 billion for each of the following three years.
Budget deficits were projected by Frydenberg to extend to the 2030s — at least ten more years without a budget surplus.
Gross government debt was projected to reach $1.17 trillion by 2026, with net debt rising to $865 billion in the same year. The level of net debt was a peace-time record at 33.1% of GDP.

When Jim Chalmers delivers his Budget next week, this is the broad scorecard he will be delivering to the people of Australia:

Two budget surpluses followed by two trivially small deficits, well below the deficits Frydenberg was aiming to deliver.
The level of gross government debt will be around $200 billion lower than Frydenberg assumed — currently around $950 billion. Net government debt is similarly lower in dollar terms and as a share of GDP will be more than ten points lower, around 22%.

But there is more to just managing the Government’s finances to the picture of economic management.

The economic forecasts in Chalmers' Budget should be welcomed by all Australians.

Inflation has been slashed and is now comfortably within the RBA 2 to 3% target band. Indeed, in the last two quarters, inflation has been just 0.2% for an annualised rate below 1%.

Wage growth has picked up to a solid but (importantly) sustainable sold pace to around 3 to 3.5% in annual terms. This means real wages are rising, which is already showing up in consumer sentiment rising to a three-year high. While there are still financial pressures on many households, the path to better living standards – higher real wages – is now underway.

The miraculous Australian economy is the envy of the world

Despite frequent moaning and groaning about the state of the economy, the hard data on a range of indicators are some of the best in the world.

There’s more to the Budget than the top-line numbers

Then there is the fairness and decency for society of what has already been delivered by a range of government policies.

Cost of living help in the form of lower out-of-pocket costs for medicine and lower electricity bills via government subsidies have been impactful as has cheaper childcare, higher wages for lower income earners and sectors dominated by female workers, which in turn has seen the gender pay gap narrow to its smallest margin on record.

Add to these is a proposed 20% reduction in student HECS debt, free TAFE places, a strategy to build 1.2 million new dwellings over five years and more funding to encourage Medicare bulk billing rates.

Good social outcomes as well as good economic outcomes.

All of this means that not only is the Budget disaster left by the previous Coalition Government being repaired, but a range of decent, life-improving economic policies have been implemented by the Albanese Government.

It will take another five years or so of prudent economic policy settings to further repair the budget and reinforce the decent policy settings already in place.

The Budget on 25 March will no doubt be the next instalment in this process of prudent economic management all encapsulated in policies that promote fairness for all Australia.

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past Chief Economist of Citibank and Senior Economic Advisor to the Prime Minister.