There aren’t many economists willing to depart from the line that Tuesday’s budget must tighten the belt on spending and be “contractionary” to prevent another hike in interest rates.
But then, Ken Henry isn’t most economists.
The former Treasury secretary has been involved in putting together more budgets than most, for both sides of politics. He also sat on the Reserve Bank board for a decade while in that role.
And while he can understand the clamour to bring down inflation, Henry has a different view to most commentators on what role the budget should play.
Speaking to the Insiders On Background podcast, Henry warns the economy is on a “knife edge”. It’s not as strong as some data points suggest. He fears a contractionary budget would be a bad idea.
“I think right now a neutral stance is the appropriate stance [for the budget] … neither adding to demand nor substantially detracting from demand,” he says.
That means no cash splash. Nor a slash and burn. It means holding steady.
But what about the clear warning from Reserve Bank governor Michelle Bullock this week that another rate hike might be required due to sticky inflation? Shouldn’t the government be pulling out all stops to avoid that possibility?
Not necessarily. It’s worth looking at what the governor said. Clearly the Reserve Bank is more worried about inflation than it was a few months ago. Its updated forecasts reflect that. There’s no denying the shift.
But Bullock is still confident rates are where they need to be.
“We believe we have rates at the right level to return inflation to the target range next year,” she said on Tuesday.
It’s only “if” new data comes in showing a need to act that Bullock will be prepared to pull the trigger. For now, that means holding steady.
The budget should also hold steady, Henry says
And in Ken Henry’s view, that’s exactly what the budget should be doing as well.
All indications from the Treasurer suggest that’s exactly what he plans to do.
Jim Chalmers told RN Breakfast yesterday his third budget will maintain a “near-term focus on this inflation fight”. He isn’t using the words “contractionary” or “expansionary”.
There will be more help for those struggling the most with cost of living, but Chalmers says this will “put downward pressure on inflation rather than upward pressure on inflation”.
That help is expected to include further relief for energy bills and possibly another top-up in rent assistance for those who are eligible.
Both measures featured in last year’s budget, along with more money for JobSeeker and the single parent payment.
Despite the extra spending, that budget was described as “broadly neutral” by then-Reserve Bank governor Philip Lowe.
Chalmers was happy with the description. He’ll be aiming for a similar reaction from Bullock this time.
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Why this budget is likely to be more ‘future’ focused
The Reserve Bank’s real worry when it comes to the budget, according to Henry, is the prospect of “nasty surprises”. It doesn’t appear there will be any such surprises next week — at least, none that will apply in the “near-term”, while inflation remains a problem.
Labor wants people to at least feel things are improving before it goes to an election. Ideally that would involve an interest rate cut, but the prospects of that have now faded.
Still, the budget will forecast real household incomes, which have been declining for the past two years, to finally grow by 3.5 per cent next financial year as inflation eases and tax cuts flow.
That appears to be the best the government can offer in the short-term.
Beyond forecasting better times ahead, Labor is constrained. It can’t spend big in the lead-up to the election, which is one reason this budget will cast much further forward to a “Future Made in Australia”.
The Prime Minister has already made some announcements under the banner of this new policy, including subsidies for local solar panel manufacturing. More will come in the budget, including tax breaks to incentivise private investment in chosen sectors.
The idea is to re-shape the Australian economy to be more self-sufficient and take advantage of the net-zero transition.
Despite the best efforts of Chalmers and Anthony Albanese to explain their thinking, however, many prominent economists remain unconvinced. And we can now add Ken Henry to that list.
“I don’t really know what is involved, I don’t know quite why it’s being done, and I don’t understand the scale of the ambition that sits behind this,” he says.
Like Productivity Commissioner Danielle Wood, Henry is particularly uneasy about subsidising local solar panel makers.
“The people who are going to have to pay for these subsidies are the same young workers who are going to have to, at some stage, bring the budget back into surplus,” he says.
Unsurprisingly, the author of the Henry Tax Review — which made recommendations 14 years ago that mostly remain on the shelf — would prefer to see a government prepared to take on serious reform, rather than the “incrementalism” that’s plagued politics for the past 20 years.
“I’ve heard the Treasurer say that he’s doing tax reform in bite-sized chunks,” Henry says.
“He needs to develop a bigger appetite or a bigger mouth.”
Without holistic reform, Henry fears productivity will continue to slide, young workers will continue to be punished, and the world will become less interested in investing and trading here.
“The stark reality is the banana republic,” he says, in an echo of Paul Keating’s infamous warning.
While his endorsement of a “neutral” budget in the short-term might be welcome news for Chalmers, Ken Henry isn’t letting the Treasurer off the hook on his longer-term plans and what’s needed to avoid a bleak future.
David Speers is National Political Lead and host of Insiders, which airs on ABC TV at 9am on Sunday or on iview.