Spending sting in the tail threatens Budget's short-term balancing act

The Albanese Government’s third Budget delivers broad-based cost-of-living support, but its spending measures risk stoking inflation, the Committee for Economic Development (CEDA) says.

“While its previous Budgets struck a good balance between supporting vulnerable Australians and fiscal repair, this Budget is less concerned with addressing the longer-term structural deficit,” CEDA Chief Economist Cassandra Winzar said. 

“The Albanese Government’s second surplus, while welcome, has again been driven by higher income tax takes and strong commodity prices. 

“These are all temporary windfalls and are unlikely to persist as the economy slows. 

“Cost-of-living relief, primarily delivered through the Stage 3 tax cuts and electricity rebates, is being delivered broadly, rather than targeted at those doing it toughest.

“Electricity rebates may alleviate headline inflation but will drive spending elsewhere. This risks working against monetary policy.” 

The changes to HECS/HELP indexation, the “prac payment” for university students’ mandatory work placements and funding to help disadvantaged students start and stay in higher education are well-targeted. 

“These measures will make a real difference for young Australians struggling with the high cost of living and housing affordability, as well as encouraging Australians into professions facing long-term skills shortages,” Ms Winzar said. 

There is little in this Budget to address the mismatch between revenue and spending over the medium term. Both sides of the equation need to be addressed to bring the Budget back into balance. 

“A good starting point would be evaluating major spending programs to ensure they are efficient and effective,” Ms Winzar said.  

“But the Government must be willing to have a proper conversation with Australians about tax reform beyond its changes to the Stage 3 tax cuts. 

“All parts of the system must be on the table – particularly the balance between taxing incomes and capital – if we want to be able fund critical services like health, aged care and education into the future, while boosting investment and workforce participation.”  

“Running longer term deficits, particularly when unemployment is expected to stay low, risks adding inflationary pressure to an already high-inflation environment.” 

Future Made in Australia 

“The $22.7 billion allocated for Future Made in Australia must be spent on measures to help projects get off the ground instead of for direct investment by government,” Ms Winzar said. 

“The Treasurer says this plan will incentivise private investment and includes strict frameworks, exit strategies and ‘off ramps’. This must be the case given the amount of money earmarked.  

“To be successful, Future Made in Australia must have better outcomes than previous similar programs. 

“The announced National Interest Framework is a good starting point but must include detailed analysis of funded programs both upfront and throughout the life of the project. 

“This means having clear objectives, undertaking transparent and independent analysis upfront, focusing on innovation and emerging technologies, and regular evaluation of policy. 

“When it does invest in projects, the Government must be willing to cut its losses on bad bets. 

“Finally, the Government must do more to support the development of green-energy workforce skills and encourage workers to move jobs and retrain.” 

Migration 

The Government has slightly reduced the permanent migration cap as it seeks to balance the need to fill ongoing skills shortages across the economy with community confidence in and support for our migration system.   

The soft cap on international student numbers also reflects this need, while maintaining support for one of our key export sectors. The Government should work with the sector to ensure this policy delivers the right outcomes. 

“The current review of the points test is an opportunity to better target the education and English language ability of skilled migrants, which should help improve our under-utilisation of migrants’ skills,” Ms Winzar said. 

“We continue to believe the Government should create an essential skills visa focused on workers in the care sector to ease persistent worker shortages in these critical roles.” 

Aged care 

Aged care is the fourth-biggest area of Government spending, with annual funding rising to $43 billion annually by 2027-28. But the sector desperately needs funding, investment and reform. 

“It is disappointing the Government has not yet responded to the recommendations of the Aged Care Taskforce. Any further delays risk the continued viability of the sector,” Ms Winzar said. 

“Australia won’t be able to provide quality care for older people without a financially sustainable system that can attract the additional investment required. 

“It is reasonable that, where they can afford it, older Australians contribute more to their care by paying for daily living costs such as cleaning, food, laundry and activities. 

“The Government should also consider including the family home in means testing for aged care. In addition to helping with funding, this would treat homeowners and renters more equitably. 

Housing 

“The $6.2 billion in new commitments to housing in this Budget is much needed to address this growing crisis. It is good to see much of this spend going towards social housing,” Ms Winzar said.  

“But there will likely be problems implementing these measures and actually building the promised housing. 

“There is little sign of meaningful progress on key barriers such as planning and zoning regulations and the lack of available construction workforce. 

“Given the scale of the crisis, we must look to more innovative approaches to getting homes built sooner, such as modular housing, new construction methods and repurposing existing buildings. 

“The Government was right to again increase the rate of Commonwealth Rent Assistance. It must also reform eligibility rules to better reflect current housing need. 

“While the Government argues the key measures of this Budget will secure the nation’s future prosperity, it must ensure its spending program doesn’t have an unanticipated sting in the tail.”