The context of this federal budget is characterised by a favourable alignment of political and economic incentives. Given 2018 is an election year, the political incentive for the government is to strengthen its consensus by adopting “expansionary” budget measures such as lowering taxes and increasing expenditure (possibly targeted to key constituencies). At the same time, with the Australian economy still running below potential, these same expansionary measures will help stimulate aggregate demand and close the gap between actual and full-employment potential Gross Domestic Product.
This alignment of incentives means that the government does not have to choose between what is good for the economy and what is politically convenient. The only possible downside risk is that by engaging in expansionary measures, the government could compromise its fiscal consolidation strategy and hence disrupt the path towards a fiscal surplus. However, the estimates available from the Mid-Year Economic and Fiscal Outlook 2017-18 and the IMF Article IV Consultation released earlier in 2018 project a steady increase in fiscal revenues, which in turn creates the fiscal space for expansionary measures.
In other words, when he took the stage, Treasurer Scott Morrison was in a truly advantageous position: he had the fiscal space to deploy the expansionary measures required to support the economy and increase consensus for its government in an electoral year. The only thing he had to do was to deliver these measures convincingly.
Did he? My answer would be: to some extent, but not in full.
“…this budget missed the opportunity to promote more drastic interventions to support employment.”
The budget does include some “textbook” expansionary measures, above all the cut in the personal income tax rate for low and middle incomes coupled with a generous allocation to expenditure in infrastructure. Lower personal income taxes are expected to stimulate private consumption, even if it is to be seen how significant the impact of the measures proposed in the budget will be. Spending on infrastructure is always popular among Treasurers, and this time it looks like a sizeable share is coming to Queensland.
In addition, the proposed investments in age care, mental health care, and medical research are welcome examples of how the government is trying to strengthen the supply of some public goods that are needed for long-term inclusive growth. On the other hand, given the favourable context, this budget could have done more to support education, particularly after the interventions introduced in December 2017.
On the negative side, this budget missed the opportunity to promote more drastic interventions to support employment, such as active labour market policies that encourage requalification and mobility of workers across sectors and regions. These policies would have also been useful in a longer-term perspective to support the process of structural transformation of the Australian economy.
Similarly, the budget contains only limited provisions to promote regional development, which is a concern given that inequality in Australia has a strong geographical dimension. Finally, the continued commitment of the government to the corporate tax cut is not good news, as this measure is unlikely to stimulate the real economy while it does contribute to sharpening inequalities.