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Fiscal discipline and pro-productivity reforms needed
Fiscal discipline and a plan for productivity-enhancing reform should be front and centre in the 2025-26 Budget as inflation risks persist while the hostile and ever-changing global trading environment, plus known challenges threaten Australia's growth prospects.
But already, tens of billions of dollars have been promised for new programs and infrastructure in the lead up to the 2025 election. There have been indiscriminate policies to lower expenses for all households, with more expected. Easing cost of living problems is still the main focus for politicians – as it has been for the past two to three years. The level of prices is causing stress for households, even though headline inflation has eased to a reasonable level.
But it is not Australia's only challenge and so we repeat our Budget wish list again in 2025:
- Not add to spending, unless offsetting it elsewhere
- Change existing policy to lower spending and find new revenue that will persist over time
- Put in place reforms to assist the private sector to maximise productivity growth.
Our concerns are based on structural expenditure forecasts exceeding revenue for another decade, even though (at least for the moment) the economy is forecast to continue growing, with relatively low unemployment, high commodity prices and a competitive Australian dollar. The Treasurer has noted that even though there will be (smallish) revenue upgrades in the Budget and some of the election promises had already been provisioned for, fiscal deficits are to be expected for some years. This means current policy settings will cause our debt burden to grow even if we avoid bad times, and if we don’t, there is no fiscal buffer to deal with downside scenarios, which means the debt and interest burden grow further.
The underlying cash balance projections made at the time of the December mid-year economic review, which Treasurer Chalmers said last week would remain mostly unchanged, were for a deficit of around $27 billion this financial year and $47 billion next year. Under that scenario, net debt rises to over $700 billion by mid-2028 (from $540 billion this year) and there is a near doubling in the interest rate bill to over $27 billion by 2027-28.
Personal income and company tax receipts decline as a share of total receipts due to the personal income tax cuts this year but return to their upward trajectory again from July.
Successful businesses given the most supportive and competitive backdrop could be a significant part of Australia’s armoury as we deal with the tail end problems of high inflation, geopolitical strife, a trade war, climate change and aging. The Budget is an opportunity to kick off further productivity enhancing (including tax) reform, which could be carried into the next term of government.
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Summary
Fiscal discipline and a plan for productivity-enhancing reform should be front and centre in the 2025-26 Budget as inflation risks persist while the hostile and ever-changing global trading environment, plus known challenges threaten Australia's growth prospects.