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Federal Budget deep dive – the Labor Government’s 3rd Federal Budget

This week, the Albanese-led Labor Federal Government handed down its third Federal Budget. 

One of the dangers of Budget analysis, especially the type of analysis that finds its way to mainstream media, is how Federal Budgets are equated to household finances. Part of the problem is using the term ‘budget’, often used in the home reflecting a household’s natural constraints of income and spending. For those of limited means, hard budget constraints are everyday considerations. 

Sovereign countries with the capacity to print their own money, including Australia, do not have hard constraints. Occasionally, countries like Italy or Greece pre-Euro or Latin America will be doubted by international finance, but this isn’t the case for Australia today; our credit is pristine. 

Instead, Budgets are a nation’s policy decisions, not the state of its savings account. So, we generally baulk at the idea of balancing money ”collected” and “spent” as a misunderstanding of both history and finance.   

Instead, Budgets are vibrant and crucial mirrors of the government’s financial values, communicated to the public through taxation and spending decisions. They articulate short-term and long-term values, some purely political but occasionally truly structural, providing a comprehensive view of a nation’s financial priorities.  

Crucially, Budgets act as a catalyst for vigorous debate and review of a nation’s financial values. This brief window in the news cycle offers an opportunity to delve into significant ideas and the potential for substantial change. The Budget itself, the Coalition’s response, and the breadth and depth of the critiques all indicate a step forward in comprehending the magnitude of our nation’s challenges.   

Budget implications for equity investors – positive for the range of portfolio positions 

For equity investors interested in long-term investment horizons, the Federal Budget provides four key considerations. 

How does the Budget impact the economy in terms of additional demand, changes in relative prices, and likely response by households? 

The budget is generally stimulatory to total demand. With weakened households facing higher interest rates and the most significant fall in real incomes in decades, additional government spending will fill the gaps.   

A considerable part of this increase in spending doesn’t count toward the “underlying budget balance”, but it will need to be funded and ultimately assessed for effectiveness.  

The increase in spending is positive for the range of portfolio positions that benefit from infrastructure and mining investment, along with industries such as supermarkets and insurance, which benefit from both spending and income growth. 

How do policy decisions in the budget change the relative conditions of one industry versus another, either through changes in demand, changes in industry support or changes in taxation?

Strong additional support was provided for a range of future-facing industries, several of which we are investing in. The Future Made in Australia (FMiA) theme was front and centre. Australia is a little behind this global trend towards onshoring activities and has progressively suffered from the rise of China in this respect. For domestic economic and geo-political reasons, there is merit in supporting changes in the supply chains for critical minerals.  

At the core of FMiA are two production tax incentives:  

  • for the domestic production of hydrogen with renewable energy; and  
  • for processing and refining critical minerals in Australia. 

How will other economic actors, including the Reserve Bank, corporate Australia and the rest of the world, respond to the Budget? 

We expect the Reserve Bank to consider the stimulus in the Budget when evaluating the future path of interest rates. It is unlikely that the once-off tricks in the inflation reduction measures (including the $300 reduction in power bills) will drive real change.  

According to respected commentator Chris Richardson, “This budget further constricts the Reserve Bank’s already narrow path, although that’s not what the government is saying.” 

In part, we suggest that this budget notifies the Reserve Bank that a rigid view on inflation and its drivers needs tempering, and the barriers to further rises should be higher. 

Indirectly, the Federal Budget forecasts how the public service (Treasury) views the economic outlook. What do we learn from their analysis? 

The budget outlook is for fragile economic growth in general. There is no rebound in genuine future productivity, and the slowing of population growth and inflation in the forecasts neither inspires additional corporate investment nor provides the Treasury with windfall gains in taxation receipts. However, the economy’s weakness is the driving force for household and industry support.   

Structural considerations and the genuine long-term 

For several years, respected observers have noted that very little focus has been placed on productivity and its improvement as part of the formal Budget process, nor as an economic agenda pursued by our nation’s leaders. 

As readers would be aware, only real productivity per capita and ongoing capital investment are likely to generate real per capita growth, increasing the value of share market investments and providing prosperity for future generations. 

Despite rising profits flowing to the corporate sector, we are not seeing increasing investment in the economy. At the same time, we are seeing a reduction in real wages.  

Figure 1: Rising profits are no longer consistent with higher levels of investment 

Source: Minack Advisors 

As underinvestment is maintained for an extended period, and when matched with record levels of population growth, it is unsurprising to see that the amount of capital in the economy per capita is now barely rising (blue line in the chart below) in trend terms. With less capital and more people, our productivity is falling – on some measures lower than in 2016 – and in the chart below, GPD per hour worked is already negative. 

Figure 2: Falling productivity and weak capital accumulation

Source: Minack Advisors 

If there were ever a time to discuss reform and productivity, it would be when Corporate Australia is making record profits, yet is not compelled to invest, nor is it receiving any productivity from the limited investment it is doing. But nothing from this budget again this year. 

Governments of both ilk have avoided difficult decisions regarding microeconomic reform, but that is no new news. Once again, productivity was not mentioned in the Chalmers 2024 Budget speech, a feature that would even appal historic Labor figures, including Wayne Swan and Paul Keating. 

With “productivity” a bridge too far, we would at least expect that structural issues in the budget need to be tackled systematically. But increasingly neither are structural considerations in the budget even discussed.  

In a classically measured manner, Saul Eslake (Independent Economist) noted that: 

“…. there’s a complete absence of any serious attempt to tackle the structural deficits which this Budget, like its three predecessors, projects out as far as Treasury’s eye can see. Indeed, at the margin, this Budget makes that problem a little bit worse.” 

And that rather than addressing, 

“ ….. those deficits will likely only be eliminated by increasing revenues – which would be best achieved through tax reform, rather than the default option of bracket creep, but it seems no-one wants to talk about it.” 

We seem genuinely incapable of discussing revenue (i.e. taxation options). Even when the solutions are unlikely to be a problem for households themselves, we believe that the political experience of the pain of the Resource Super Profit Tax (RSPT, 2010) has permanently scarred the capacity of Australian governments to propose measures that are likely to be attacked by the power of corporate-funded public relations. 

On a similar vein, David Llewellyn-Smith at Macrobusiness noted: 

“The problem is that the budget does not include structural measures to fix the government’s two biggest mistakes. (Energy Policy and Migration).” 

The issue regarding energy is particularly fascinating this Budget, and the government chose to spend public funds to subsidise electricity costs ($3.5bn over 3 years), partly due to high energy prices. 

The Australia Institute cleverly noted that despite enormous returns for gas and electricity companies, the PRRT (Petroleum Resource Rent Tax), which could have offset the current high prices, will be collecting very little in 2023-4. 

A reform agenda attacks such problems; doing nothing does nothing! 

Source: The Australia Institute Budget Review

Growth or managing decline 

A response to the budget that certainly got your author thinking came from the very politically motivated John Roskam (Senior Fellow at The Institute of Public Affairs). It warrants careful attention, but we wouldn’t suggest there are easy answers. 

Should a nation that is now more anxious drive a political agenda that appears to shy away from aspiration and growth? 

“The years of COVID-19 taught people to appreciate what they have. The public demonstrated how averse to risk it was, but aiming for growth inevitably involves risk… 

…it’s hard to avoid the conclusion Australia’s best days might be behind it. Decline is not inevitable. We can choose to fight the fall in our prosperity, or we can manage that decline. 

Roskam suggests that this Budget is about managing decline. It is hard to argue against, but equally hard to plot a path of change that would see a different outcome in the short term.  

One of the challenges for change is the fact that in the short-term, aggressive reform is unlikely to be positive for the current Australians, their house prices, their share portfolios or their direct descendant economic futures. What it could generate is future opportunities and future growth. 

Debt levels

Whilst some commentators bemoaned the lack of surpluses and as noted, some incorrectly thought that budgets were solely about matching taxes and expenditure, market views on the outlook for government debt are reasonably balanced. 

According to Barrenjoey (a prominent and respected stockbroker), and shown clearly in the chart below, net debt is set to stabilise as a share of GDP while interest payments remain low. 

Figure 3: Outlook for debt and interest payments 

We would add that the comparison to other nations debt levels is favourable, and the overall level is a healthy balance between making the most of our capacity to borrow and keeping capacity for a rainy day or economic downturn. 

The size of the Government

Central to the lack of reform, weak productivity, and a “managing decline agenda” is role and size of the government. Whilst different political persuasions will generally have views on the size of government, the nuts and bolts of the exercise of government provision in Australia are relatively straightforward. 

First, let’s look at the average size of the underlying payments (spending, in blue) as a percentage of GDP since 1975. The average, courtesy of Saul Eslake, is 24.7% of GDP, with a significant amount of variation across almost 50 years. It is generally higher in recessions, including COVID.  

Looking at the forward estimate to 2035, we see that the government’s share of the economy is around two percentage points higher than history. 

Figure 4: Government: Increased share of the economy: Forward estimates and projections of underlying payments and receipts 

Source: Saul Eslake, Independent Economist, Govt Budget Papers 

However, when we break down the sources of this increased expenditure in the following chart, we come full circle to the beginning of the article.  “Budgets are a nation’s policy decisions, not the state of its savings account”, and “they articulate short-term and long-term values”. 

The following chart from Barrenjoey perfectly encapsulates the decisions we are currently making. The additional two percent of GDP, the growth in the size of government, the “managing the decline” in Roskam’s words, are simply the Big 5 (Infrastructure, Defence, NDIS, Health and Aged Care) 

In the case of Health and Aged Care, a great deal of the increase is in higher wages for the traditional underpaid workers in the sector. The NDIS continues to balloon in costs despite reform, and higher Defence spending is a consideration for nations globally.

Figure 4: The drivers of the change in Budget Cash Balance 

When we struggle to identify which of the drivers of bigger government we would look to change at the margin, we need to begin to manage the entire equation of taxation and spending. 


Federal budgets are challenging, politically motivated, and particularly difficult to manage in terms of messaging and values. Yet they remain critical for longer-term investing and as an expression of political will. 

The Federal Budget 2024 was passable insofar as it attempted to redress some of the shortfalls of our current economic condition (cost of living and investment problems). However, once again, it failed to address long-run considerations of what governments should aim for and how.  

It also failed to make ground in the structural shortfalls of the Budget itself, preferring to let that problem roll another year …. 

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.

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