Budget Review 2022–23 Index
Ian Zhou
A central theme of the 2022–23 Budget is ‘cost of living
relief’. The Budget announced an $8.6 billion cost of living package aimed
at helping Australians combat rising living expenses linked to recent surges in
petrol prices and relatively high consumer price inflation. The cost of living package
includes measures such as:
These measures were passed by
the Parliament on 30 March 2022. The Treasurer
stated in his Budget speech that the Budget ‘delivers cost of living relief
now’ and ‘creates jobs for the long-term’, whereas critics
have said it is a ‘cash splash’ that does not present a serious plan for
the future. Several commentators also raised concerns
about the Budget’s potential inflationary impacts, including through these
temporary measures.
Temporary reduction in the fuel
excise
In March 2022, Australian retail petrol prices increased
above the $2
per litre barrier due to rising global oil prices. The price
increases are a consequence of OPEC
oil supply decisions, exacerbated by global feedback effects from the
Russian invasion of Ukraine (Russia being a major crude oil exporter and the
war and associated sanctions regimes have disrupted markets). In response, the Australian
Government has said it ‘will help reduce the burden of higher fuel prices at
home’ by temporarily halving the excise and excise-equivalent customs duty
rate that apply to petrol and diesel.
The fuel excise is levied by the Government on petrol and
diesel and is built into the retail petrol prices consumers pay at petrol
stations. It is levied to raise revenue to fund roads and other infrastructure
costs.
From 30 March 2022 until 28 September
2022, the fuel excise rate will be reduced from 44.2 cents per litre to 22.1
cents per litre. The Customs
Tariff Amendment (Cost of Living Support) Bill 2022 and the Excise
Tariff Amendment (Cost of Living Support) Bill 2022 have retrospectively
given effect to the measure.
The Budget estimates that this
measure will reduce the Government’s tax receipts by $5.6 billion. Due to
the reduction in the fuel excise, the Government will also temporarily cut $2.7
billion in fuel
tax credit payments (colloquially known as ‘diesel rebates’) to the mining
and agricultural sectors, bringing the total cost of this measure down to $2.9
billion (p. 15).
Budget
Paper No. 3 notes the measure will also reduce goods and services tax (GST)
revenue by $195 million (p. 108). GST on fuel is
viewed by some as a ‘tax
on a tax’ because fuel prices already include the fuel excise (in the same
way GST applies to prices of services that factor in state payroll taxes).
The
Treasurer said the measure ‘will flow through to the bowser over the next 2
weeks’ and that the Australian
Competition and Consumer Commission ‘will monitor retailers to make sure
these savings are passed on [to consumers] in full’.
One-off cost of living tax offset
The Government announced that they will also increase the
low and middle income tax offset (LMITO) for the 2021–22 financial year. A tax
offset provides a payment through the tax system to an eligible taxpayer,
directly reduces the person’s tax payable. The LMITO was first announced in the
2018–19
Budget as part of the Government’s Personal
Income Tax Plan. The 4 subsequent budgets have extended the LMITO.
The 2022–23 Budget announcement means that low and middle
income earners will receive a one-off tax offset of $420, in addition to the
existing LMITO $1,080 offset, bringing the full offset to $1,500 per person. Taxpayers
will receive this one-off tax offset when they lodge their tax returns from 1
July 2022. The LMITO will subsequently be discontinued.
The full offset of $1,500 will only be available to
individuals with an annual taxable income between $48,001 and $90,000. This is
because the tax offset offered by the LMITO starts to phase out above the
$90,000 threshold, reaching zero at an annual taxable income of $126,000. At
the same time, the benefit from the LMITO declines if a person’s taxable income
is below $48,000 and disappears entirely for those with no assessable income.
This measure is expected
to reduce the Government’s tax receipts by $4.1 billion (p. 16) and provide
tax relief for over 10 million individuals. The measure has been enacted by
the Treasury
Laws Amendment (Cost of Living Support and Other Measures) Bill 2022 passed on 30 March 2022.
Permanence issue
John Maynard Keynes, the namesake of Keynesian economics, proposed
that while governments should cut tax to stimulate the economy during
recessions, stimulus measures should be temporary. Once recessionary
pressure eases, governments should aim to run a balanced budget or even surplus
during normal or good times.
The Treasurer has said that the ‘temporary,
targeted and responsible cost of living package’ will ease pressures for
Australians. A potential challenge, however, is how to end these temporary
measures: as economist Milton Friedman once quipped, ‘nothing is so permanent as a
temporary government program’.
While the measures are intended to be temporary, there is
evidence of persistence in one-off payments. For example, tax relief provided by
the LMITO has been brought forward and extended over successive budgets, and
some of the Government’s COVID-19 stimulus measures (examples include the International
Freight Assistance Mechanism and the Pandemic
Leave Disaster Payment) have continued into the present notwithstanding
that most COVID restrictions are already lifted. Several one-off
social security payments have also been maintained over time.
The persistence of ‘temporary’ and ‘one-off’ cash injections
into the economy has implications for inflation and inflationary expectations.
Inflationary concerns
At its most fundamental level, inflation, particularly ‘demand-pull’
inflation, is caused by ‘too much money chasing too few goods’. Rising
inflation means the goods and services households buy will cost more, which
manifests most directly as increased cost of living pressures.
When required, governments or central banks can inject money
into the economy hoping it will stimulate productivity growth and lead to more
goods and services being created over the long term. The theory is that more
goods and services in the economy eventually moderates inflationary pressures
and dilutes the level of debt compared with the size of the economy.
However, if the injection of money fails to stimulate
productivity growth or leads to the creation of more goods and services, then
it may exacerbate inflation, because more money is chasing the same amount of
goods and services.
2022–23 Budget measures and
inflationary pressures
Many commentators have warned of the dangers of ‘fiscal
rocket fuel’ in the 2022–23 Budget, expressing concerns that ‘handing
out billions in one-off payments’ will exacerbate inflation in Australia. Some
commentators and forecasters
have tipped faster Reserve Bank interest rate rises as a result.
The concerns are heightened in the context of other
inflationary pressures and warning signs. The Government’s current expansionary
fiscal policy is continuing off the back of the significant stimulus spending
in the past 2 budgets—or as the Age puts it, ‘pandemic
stimulus out, but election stimulus in’—and the Reserve Bank’s expansionary
monetary policy of ultra-low interest rates and
quantitative easing.
These cost of living payments coincide with significant
improvements in the macroeconomic
outlook that point to a strong economic recovery following the COVID-19
induced economic downturns. Analysts at Deloitte Access Economics believe ‘Australia’s
economy is well past the point at which additional stimulus is needed’.
Concerns had already been voiced in 2021 about the growing risk
of over-heating in the construction sector in response to the massive
COVID-19 stimulus.
Against this backdrop, the Grattan Institute has warned that
the quantum of spending on the cost of living tax offset and welfare payments
in the current inflationary environment is ‘bigger
than the Rudd government’s first fiscal stimulus package for households during
the global financial crisis’.
Not
all economists share the fear this Budget will drive inflation, and for its
part, the Government has argued that Australia’s current inflation is ‘driven,
according to Treasury, largely by international factors’ and is expected to
moderate. The Treasurer
and the Minister
for Finance have further argued that as higher petrol prices directly drive
inflation, the temporary cut in the fuel excise will decrease inflationary
pressure, with the Treasurer stating that ‘our
cut to the excise will reduce the inflation rate by a quarter of a percentage
point’. The Civil
Contractors Federation had called for the fuel excise rate to be cut to
provide at least partial relief from the immediate inflationary pressures in
the construction sector.
Short term relief vs long term
economic growth
The Government’s cost of living package will provide
temporary relief from inflation in the short term.
Budget critics have pointed to a lack of reforms to drive
significant productivity growth, which is needed if economic growth and incomes
are to outpace inflation in the long run. Some of the long term economic challenges
in Australia include productivity
growth slowdown, tax
system inefficiency and rising
wealth inequality.
Australia is facing challenges regarding 2 out of the 3 major
drivers of economic growth (namely ‘productivity,
population
and participation’). Commentators have argued that rather than expanding tax
relief, structural
fiscal reform is needed to tackle Australia’s
productivity challenge and boost economic growth over the long term.
Economists have questioned
the productivity and wage forecasts in the Budget, saying they are optimistic
and create ‘an unrealistically rosy outlook’ that could mask the need for enduring
policy reforms.
At best, cost of living measures in the Budget will provide
short term relief from the effects of inflation without contributing to
inflationary expectations, and the Treasury’s productivity and wages growth
forecasts will be borne out. However, in a worst case scenario, these measures
may exacerbate existing inflationary pressures, while the lack of
productivity-boosting reform initiatives may see a return to the pre-COVID-19
trend of anaemic productivity, economic and wages growth.
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