Five comments about next week’s Budget

Next week we will see the first budget handed down by the Albanese Government. What I have heard in private in Canberra is aligned with the public language, that this budget will revise economic parameters to match deteriorating global economic conditions while also incorporating election commitments. People should not expect a swathe of announcements on Tuesday. Most new announcements will be left to future May budgets.

I have experienced the arduous task of poring through budget papers released on a Tuesday night, looking for policy adjustments and budget measure revisions buried in tables. With this experience and judgement, I have five comments about Tuesday’s budget:

1. Persistent inflation
   • Rather than focusing on the peak of the inflation figure, watch for how long Treasury expects it will take for inflation to return to the RBA band of 2-3%. If persistent high inflation continues for longer than expected, we could see some companies incorporating these levels in longer-term pricing contracts, locking in higher inflation for longer. If the RBA is seen as credible, this risk is low. However, the RBA has come under scrutiny about previous monetary policy statements and this lack of confidence places pressure on the Government to use its own fiscal policy (think spending decisions) to help reduce inflationary pressures in a timely way.
2. Wages
   • Wage forecasts will be a measure that the new Government will be held accountable for given the role wages played in the election campaign. Expect more detail in this budget compared to past budgets about how the Government expects to achieve the forecasts. 
3. Revenue
   • The Treasurer has been on the record in the past as being open to increasing the major bank levy. As a levy introduced by the former Prime Minister, the Treasurer could increase this relatively small levy without much risk.
4. Expenditure
   • The Government will likely include a lot more detail on future defence and health expenditure. While this budget won’t make clear announcements on either, it will lay the groundwork for future budgets that increase funding alongside structural reforms. In the reverse, look for portfolios where there is little commentary – a potential sign that future expenditure decisions are coming.
5. Debt
   • The previous budget had a weighted average treasury bond maturity of 7.2 years. Without going into details, it would make sense to extend this maturity further by increasing the use of 30-year bonds. After all, some of this debt is going to take a long time to pay off. In the process, the Government can take some pressure off interest rate risk.

The new Government is facing a difficult economic environment. There are also no easy answers to fixing the structural deficit. Given the increasingly uncertain global context, do not underestimate the focus the Government will place on expenditure between now and May 2023. Any economic downturn will quickly deplete corporate and personal income tax receipts and therefore any expenditure decisions will put the budget in better shape and afford the Government more flexibility. Any difficult expenditure decisions taken soon will also improve the credibility of future revenue raising. Those who interact with the Albanese Government should keep this in mind.