Budget must reset expectations to preserve intergenerational bargain

Next week’s mini-Budget must be the blueprint Australia did not get in the pre-election frenzy of the Morrison Government’s dying days.

To reset expectations and fight inflation, the Albanese Government’s first budget must show restraint in the face of calls for poorly targeted cost-of-living relief. It must also limit any new spending to measures that will actually grow capacity in the economy.

This is a lot trickier than it sounds when the economy is hitting the hip pocket hard, but temporarily bolstering the budget bottom line.

The newly announced plan to extend paid parental leave to 26 weeks is a key workforce participation measure and will help more households balance work and children in a more equitable way. It is also good to see the new Women’s Economic Equality Taskforce advising on the model.

The promised boost to childcare will simultaneously ease cost-of-living pressures while lifting workforce capacity, by allowing more parents to enter the workforce and reducing some of the disincentives to working more hours.

We still need greater clarity on the Government’s infrastructure announcements, in particular the role that business cases and bodies such Infrastructure Australia will play in decisions on funding and the priority projects that will drive future growth.

Beyond immediate measures, the Budget will outline the Government's medium-term strategy. Having identified debt servicing as one of the big five pressures on the budget, that strategy must centre on the Government's approach to reduce debt over time and rebuild fiscal buffers for the next crisis.

The “over time” part is important, because Australia is not facing an immediate debt emergency. Net debt is tracking at around a quarter of the economy or half of the trillion-dollar amount regularly bandied about. That doesn’t mean we shouldn’t start preparing now for the expected economic shock that comes along each decade on average.

Every episode of debt consolidation has been different. This time, the Government is helped by much of the debt being locked in at very low interest rates. But the free lunch may well end there. Growing our way out of debt is far from assured by current global circumstances or official forecasts, suggesting the Budget may be called upon to do more of the heavy lifting over time.

Stage three tax cuts must be scaled back

Despite this conundrum, the stage 3 tax cuts look set to live another day. The recent frenzied debate about their fate is a sign of the trade-offs that will only become more stark with a permanent increase in government programs driving a 2 per cent of GDP structural wedge into the Budget.

But leaving the personal income tax system completely untouched is neither good tax policy nor a long-term panacea for our budgetary challenges. Left untouched, the system will become less progressive. The current tax package is not affordable and should be re-phased and scaled back in the Treasurer’s second budget, in May next year. That will allow a proper assessment of its affordability and the best options for both addressing bracket creep and maintaining progressivity.

As baby boomers retire, the fragility of Australia’s intergenerational bargain will become even more apparent. Working-age Australians will be forced to carry the fiscal burden of both past debts and future liabilities. The longer we put off changes to consumption and wealth taxes, the more fragile that compact will become.

No need for cynicism on ‘wellbeing’

Cynics might see the government’s proposed “wellbeing budget” framework as a cover for expensive new spending programs. But applied rigorously, it will sharply prioritise spending on the things that matter. Take health – despite our world-class health system, we are ranked 20^th in the world for per capita spending on preventative health. The best gains in future health and wellbeing for each dollar spent will be made by putting more of our spending there.

Many commentators have played down the impact of the Government’s policies to end waste and rorts. They won’t turn the budget around, but they are an important marker of fiscal credibility. You cannot preach restraint while continuing to administer opaque and inefficient grants programs or let spending on public sector consultants run rampant.

If the Government wants to truly demonstrate its bona fides on transparency and discipline, it should reinstate regular evaluation into government programs and refresh the Charter of Budget Honesty Act. The 25-year old act needs renovation to lift the quality, transparency and scrutiny of federal finances. Our budget practices have not been updated despite developments such as the increasing gender lens needed on the Budget, the growing financial risks of climate change and the evolving role of the Parliamentary Budget Office.

Treasurer Jim Chalmers will have seven months between his first and second budgets, an advantage in an economic environment that is moving rapidly. Next week, he must double down rather than delay overhauling the budget blueprint.