31 March 2023

The Budget that we’ll hand down in less than 40 days is being developed in a complex environment here at home and in the global economy more broadly.

Opinion piece: Global volatility underlines challenges for Budget

Published in The Australian

The Budget that we’ll hand down in less than 40 days is being developed in a complex environment here at home and in the global economy more broadly.

This week, new ABS data revealed retail sales have dropped around 2 per cent since November, and while Wednesday’s monthly reading showed that inflation continues to moderate in welcome ways, it remains unacceptably high.

Internationally, central banks and authorities continue to manage the uncertainty coming from market turbulence, which we won’t remain completely immune from despite our strong position. 

We’re monitoring all these indicators closely as we enter the final stretch of Budget preparations for May. While it’s unusual to have two Budgets in one year, this is both necessary and deliberate.

Our October Budget was an important opportunity to fund election commitments, align our strategy with the economic conditions we inherited, and lay foundations of restraint and responsibility.

We did all that while finding $22 billion in savings – zero were found in the March prior – and banking 92 per cent of revisions to revenue, compared to an average of 40 per cent under the last government (and just 30 per cent under the Howard Government).

A combination of policy to lift the speed limit on the economy and Budget restraint is working on both the supply and demand side of our economy to make sure we don’t add to inflation, while setting us up to grow the right way out of the slowdown.

Some of the key influences that shaped the October Budget are still with us now. A lot has changed since then, but a lot has stayed the same.

Higher rates and the challenges coming at us from around the world are still due to slow our economy. We faced high inflation in October, and it will still be too high in May.

Our Budget’s long-term structural position also remains under pressure from the big five of interest costs, NDIS, aged care, health and defence. And while elevated commodity prices should provide another near-term boost to revenue, this won’t make up for the medium-term pressures we face.

All of this means common threads tie the strategy of the last Budget to the next one: striking the right balance of near-term and longer-term priorities; delivering the best combination of relief, repair and restraint; and putting a premium on the quality of spending not just the quantity.

But what has changed since October will impact how we see and frame what we deliver in May.  

Events of recent weeks show that we now have more volatility in the global financial system, brought on by sharp and synchronised rate rises around the world.

I was encouraged by my conversations this week with Janet Yellen, US Treasury Secretary and Christine Lagarde, President of the European Central Bank. They, and other international authorities, stand ready to do what’s necessary to reassure markets and keep credit lines open.

Co-ordinated action by central banks and other authorities has already helped ease some concerns in global funding markets, but all remain vigilant to new developments – and so do we.

That’s why I convened the Council of Financial Regulators on Thursday to discuss the situation, and the message I received was the same one that I’ve heard in all my regular briefings with industry, Treasury, and international counterparts – that we can’t hope to be completely unaffected by global financial frictions, but our banks are well-capitalised, well-regulated and well-placed.

Nonetheless, this financial volatility is feeding into concerns about the global economy, with forces pushing and pulling expectations in different directions.

Some of the slightly more positive signs out of China, North America and even Europe are being tempered by uncertainty around the impact of monetary policy tightening, the impact of market turbulence, and the ongoing fallout from Russia’s invasion of Ukraine.

Here at home, inflation is moderating, and the RBA has said rate rises are closer to a pause.

We’ve also had a bigger bounce back in temporary migration than expected, but even with this short-term pick-up Treasury doesn’t expect us to catch-up to the pre-pandemic forecast until the end of the current decade. 

In these conditions, we’ll need this Budget to strike a series of difficult balances.

Between funding unrelenting spending pressures and the need to show restraint; managing high inflation and setting us up for sustainable growth; and dealing with an uncertain near-term global outlook while investing in the drivers of our long-term success.

That all means we have eight priorities for May: responsible cost-of-living relief; engaging our supply-side growth drivers; funding national security priorities, including AUKUS; the care economy and improving essential services; women’s economic participation; place-based initiatives to address entrenched disadvantage; cleaning up unfunded programs; and restraint and responsibility across the board.

This is the best way to manage uncertainty abroad, pressures at home, and maximise our opportunities in the years ahead.