With Treasurer Jim Chalmers handing down the federal budget on 12 May, AMP’s Chief Economist Shane Oliver says the latest global crisis makes the case for genuine reform stronger, not weaker. He has set out the five things the Budget needs to deliver.
With inflation on the march again, petrol prices surging (despite the government’s pricing relief) and another rate rise already locked in, households are squeezed.
According to AMP Chief Economist Dr Shane Oliver, the Treasurer should resist the temptation to ease the squeeze with cash splashes in the name of cost-of-living relief.
In a research note published 21 April, Oliver argues that the current crisis makes the reform case stronger rather than weaker, and lays out five things the Budget needs to deliver if the government is serious about putting the Australian economy onto a stronger path.
Dr Oliver acknowledges in his note the political conditions favour ambition. The question, in Dr Oliver’s framing, is whether next week’s Budget delivers on that commitment or quietly walks away from it.
1. Limit any cost-of-living stimulus
Oliver is direct on this point. Some form of cost-of-living relief is likely, but the lessons from both the GFC and the pandemic apply.
Any fiscal easing must be timely, targeted, temporary and calibrated to the size of the threat.
Direct transfers to households and to businesses with high energy cost exposure are preferable to extending fuel tax cuts, because the latter blunts the price signal that consumers and industry need to receive.
The deeper problem, in Oliver’s view, is that fiscal stimulus delivered into a supply shock makes inflation worse rather than better.
With the RBA already moving to prioritise getting inflation down through its only available mechanism – rate rises – additional stimulus from the budget side would simply force the central bank to tighten further.
Under AMP’s base case – that the Strait of Hormuz reopens in the near term and the conflict moves toward resolution – Oliver argues that any further stimulus should be minor, no more than $5 billion, or 0.2 per cent of GDP.
2. Cut government spending
Dr Oliver’s analysis shows public spending across federal, state and local levels has surged from a 40-year average of around 22.5 per cent of GDP to 28 per cent in the post-pandemic period.
Federal spending alone has risen from 24.3 per cent of GDP in 2022-23 to a forecast 26.9 per cent this financial year, and the December MYEFO projects it will settle at that higher level rather than retreating to pre-COVID norms.
The implication, in Oliver’s reading, is that the public sector has crowded out the private sector’s room to grow.
When private spending finally rebounded last year, the economy ran straight into capacity constraints, which fed directly into the inflation rebound the RBA is now responding to.
His prescription is to bring federal spending back to around 25 per cent of GDP, in line with the longer-term norm, over the four years to 2029-30. That entails cutting roughly $102 billion out of federal spending over the period and constraining annual spending growth to 3 per cent.
It would require cuts to the NDIS – which Oliver notes the government appears to be moving toward – alongside more aggressive cuts to the public service and tighter means-testing of welfare.
It would also require the Treasurer to “save” most of any new revenue windfall flowing from higher energy prices and stronger commodity prices, which Oliver puts at between $30 billion and $60 billion over the forward estimates period. Oliver’s reference point is the October 2022 budget, in which 81 per cent of the windfall was saved.
3. Serious tax reform, not just tax hikes
Media reports ahead of the Budget have flagged a range of targeted tax measures. Reducing the capital gains tax discount, limiting the number of properties that can be negatively geared, introducing a minimum tax on trusts, an export levy on gas producers, and bringing EVs into a road user charge. Oliver acknowledges most of these have merit on their own terms.
His objection is that on their own, they amount to a tax hike rather than tax reform.
Real reform, in his framing, addresses four structural issues with the Australian system. Income tax accounts for 62 per cent of total tax collections in Australia, against an OECD average of 35 per cent. The top marginal rate of 47 per cent kicks in at a relatively low multiple of average earnings, with the top 10 per cent of taxpayers paying nearly half of all personal income tax. Bracket creep is doing fiscal heavy lifting that should be the subject of explicit parliamentary decisions.
Oliver’s recommended package is structural rather than incremental: lower personal tax rates with higher thresholds; a lower corporate tax rate; a higher and more comprehensive GST; compensation for low-income earners and welfare recipients to offset the GST increase; indexation of tax brackets to inflation; and the replacement of stamp duty with land tax. The shift from income tax toward GST, he argues, is the single most effective lever for improving intergenerational equity, given the rising health and aged care costs falling on younger workers.
4. Significant productivity reforms
Productivity growth has stalled over the last decade. For Oliver, this is the issue underpinning everything else — without productivity gains, the economy cannot expand its capacity to absorb growth without generating inflation, and living standards cannot improve sustainably.
The first three recommendations contribute to productivity by freeing up capacity and removing distortions, but Oliver argues the Budget needs to go further on product and labour market deregulation specifically.
Less red tape, more flexibility, easier paths for companies to invest, and stronger investment incentives are all on his list.
5. Reform the Charter of Budget Honesty
The fifth recommendation is technical but consequential.
Oliver wants the Charter of Budget Honesty reformed to refocus attention on the headline budget deficit, given the increasingly widespread practice of treating significant spending as “off-budget investments” while still adding to public debt.
He proposes that any such off-budget investment — particularly those undertaken on the grounds of “making more things here” or “supply chain resilience” — be assessed on a cost-benefit basis by an independent body such as the Productivity Commission.
You can read Dr Oliver’s full research note in PDF form.
