From headwinds to tailwinds
On 9 May 2023 Treasurer Jim Chalmers handed down the 2023-24 Federal Budget aimed at addressing challenging headwinds including higher interest rates, inflation and cost of living pressures. A modest surplus of $4.2 billion – the first surplus in 15 years – is a welcome surprise built on tailwinds: favourable commodity prices, a strong labour market and higher migration in the short-term.
The long-term forecast position looks promising. Savings on interest costs and the NDIS are anticipated to help to improve the structural budget position over the next decade. Gross debt is estimated to peak 10.4 percentage points lower, and five years earlier compared to the October Budget.
The 2023-24 Budget includes a substantial improvement in the Federal Government’s fiscal position from the October Budget, largely due to much higher personal income tax and company tax receipts than previously assumed.
In summary, the key announcements were:
Deloitte’s Budget digest provides insights on nine major themes below.
A stronger-than-expected Australian economy has driven a surge in tax revenue and a $41.1 billion turnaround in the fiscal position that was forecast in the October Budget. An underlying cash surplus of $4.2 billion is now forecast for 2022-23.
Government spending has also increased, but much more moderately than revenue. The centrepiece of the Budget is a $14.6 billion cost-of-living package that includes a range of payments for low-and middle-income families from savings on energy bills and cheaper medicines to modest increases to JobSeeker and rent assistance.
The Budget is still projected to revert to a deficit over the forward estimates and beyond. However, the forecast long term position has improved significantly compared to what had been expected at the time of the October Budget. Savings on interest costs and the NDIS are now anticipated to help the structural Budget position move closer towards balance over the next decade.
One of the centrepieces of this year’s Federal Budget is the $14.6 billion cost of living package, which comprises of the Energy Price Relief Plan together with increased support payments to many recipients of government payments.
The Government has announced a $14.6 billion cost of living plan which packages up a number of announcements to provide help with power bills, bring down out-of-pocket health costs (by capping the price of medicines on the PBS), support vulnerable Australians, create more affordable housing and boost wages (aged care workers).
Australia has confirmed the implementation timeline for the OECD/G20 Pillar Two global minimum tax rules starting from 2024. The most significant revenue impact in the Budget is $7.6 billion, comprising of GST and other tax receipts expected to be collected from an expanded GST compliance program. In addition, the ATO has received significant other funding to continue other compliance activities.
The Federal Budget presents decarbonisation, electrification, adaptation and nature as underpinning Australia’s future growth and development. Across the funding announcements made, the Government has clearly linked energy and climate action to the re-industrialisation of the Australian economy.
For example, this Budget sees funding for the development of a competitive hydrogen industry, a focus on scaling renewable energy, critical minerals and decarbonisation technology, and prioritisation of disaster resilience and reforms to protect Australia’s environment.
More detail is required on the specifics for some of the larger announcements such as Hydrogen Headstart and the Net Zero Authority, but overall this Budget positions Australia to benefit from decarbonisation and keep communities safer from increasingly damaging natural disasters, whilst protecting and restoring our natural environment.
There has been significant activity in the Defence Portfolio over the past two months, including the AUKUS announcement relating to nuclear-powered submarines in March and the long-awaited release of the Defence Strategic Review in April.
The Government’s commitment of $19 billion across the forward estimates will require the Department of Defence (Defence) to generate savings elsewhere. This will include reprioritising its Integrated Investment Program to deliver on these required capability investments, including:
The pleasing outcome from the budget is that Defence funding will increase to above 2.3% of GDP in 2032-33.
The health Budget headlines point to considerable investments to address the decline in GP bulk billing rates, via a tripling in the bulk billing incentive at a cost of $3.5 billion. Behind the headlines are important signposts of reform to provide team-based care, blended funding models, longer consults and digital technology. These comparatively small investments signal an important shift to a more modern health system.
Health as a share of total government expenditure is expected to decline from 15.6% in 2023-24 to 15.1% in 2026-27 – while it is not about what you spend but how it’s spent, this does reveal government’s funding priorities. In comparison, investments in aged care and the NDIS have increased from 9.9% to 12.4% over the same period, even with the targeted expenditure caps for the NDIS.
This Budget lays the necessary foundations to better integrate health with social care programs to benefit more Australians.
Compared to previous Budgets and given the rising cost of mental health as a share of total health costs, this Budget delivered relatively little for mental health. The only announcement related to $556.2 million over five years from 2022–23 (and $36.0 million ongoing) to strengthen Australia’s mental health and suicide prevention system.
With a review of Australia’s Infrastructure Investment Program underway, the 2023-24 Federal Budget reflects the Government’s focus on managing inflationary pressure in a resource-constrained infrastructure market. New announcements on supporting future social and economic growth with investments in social and cultural infrastructure offer a more holistic approach to nation building.
Specific announcements are limited to social and cultural infrastructure initiatives such as:
Spending will support the delivery of infrastructure solutions that will contribute towards the growth of our health and defence industries while introducing sustainable practices.
Following its preliminary Budget in October last year, the 2023-24 Federal Budget demonstrates the Government’s current focus on reviewing the scale and value for money of the national infrastructure investment pipeline in the current inflationary environment. This Budget seeks to balance climate resilience and productivity improvements with affordability in the face of short-term resource and long-term fiscal constraints.
In advance of the Budget, the Government announced a review of Australia’s Infrastructure Investment Program covering $120 billion in land transport projects, which is due to conclude in August 2023. The review is a key influence on the Budget, with prudent investment and project delivery a key focus, reflecting challenges in managing both:
Accordingly, the Budget demonstrates a measured approach to transport infrastructure investment, with a movement away from significant expenditure on new and existing mega projects in favour of management and delivery of existing core programs, and targeted co-investment with states on smaller-scale transport, urban development and other social/cultural infrastructure projects.
Consequently, we see the Budget having the following potential impacts:
Economic equality, safety and protecting vulnerable cohorts feature strongly in this year’s Women’s Budget Statement. Some of the headline spending items include $11.3 billion towards the predominantly female aged care workforce, $1.9 billion to expand eligibility for the Parenting Payment (Single) and $2.7 billion towards increased Commonwealth Rent Assistance payments.
The new measures meet four of the six urgent priority action areas put forward ahead of the Budget by the Women’s Economic Equality Taskforce (WEET). However, abolition of the Childcare Subsidy Activity Test and payment of superannuation for primary carers while they are on Paid Parental Leave – two of the more significant items on the WEET’s priority list – have not been included. Further, there is a notable absence of investment in women’s specific health initiatives.
Overall, the Budget signals a positive step for women. However, there are further opportunities to achieve a step change and strengthen the intersectional approach to entrenched disadvantage.
While this Budget focused on incremental improvements to existing policies and prioritised support for those currently outside the workforce, this comes at the cost of truly modernising the workforce to prepare for the new digital economy.
To realise the Treasurer’s ambition for a modern economy, further initiatives to increase the productivity, capacity and efficiency of the Australian workforce are critical.
A modern economy needs a modern workforce. There are opportunities to further support education and skills development, increase skilled migration and embrace a holistic approach to the health and prosperity of the workforce - including prioritising psychological workplace health and safety to yield greater wellbeing, productivity, and capacity to perform complex work.
The Treasurer has signalled a clear intent to create a modern economy, however this Budget introduces only a few new initiatives to accelerate the transition to a modern workforce. Investments in new and emerging technologies, measures to increase participation to improve inclusiveness and social inclusion are positive steps.
The transition to a modern workforce also requires a greater focus on initiatives to improve productivity and efficiency, enhance workplace health and create a workplace relations framework which promotes flexibility, productivity and growth at the enterprise level.
While there was no substantial new funding in the education sector, this Budget sets down a view of education as a growth engine and a way to improve social access and equity. During 2023 broad-based education reviews will be in progress in early childhood education and care, schooling and the university sector which are likely to establish a platform for more substantive reform in the future. In the short term, this Budget consolidates existing initiatives in areas of priority - namely support for child care, access to fee-free TAFE - and makes modest efforts to strengthen the education workforce in the face of major supply pressures.
At first glance, this Budget doesn’t have a strong education and training focus, which is no surprise given the multiple reviews into early years, schooling and tertiary education currently under way. That said, there is a recognition in this Budget that education and training are the vehicles to drive the economic and social outcomes the Government is intending to deliver.
The Government’s view of education as a lever for workforce and economic growth is reflected in the investments in tertiary education, chiefly the $3.7 billion investment into the skills agreement with states and territories. 300,000 fee-free TAFE places for critical and emerging industries and a further 4,000 Commonwealth Grants Scheme-funded university places will also help to build capacity in the sector to produce the future workforce we will need. At the same time, the additional funding for student disability support services and women studying pre-degree courses in STEM support the Government’s access and equity goals. Nonetheless, forthcoming changes that are expected to arise out of the Accord process or new National Schools Reform Agreement leave much room to speculate about potential future reform.
Behind the scenes of the Government’s big election commitment – Cheaper Child Care – is the capacity of an already stretched ECEC workforce to deliver. As more families are able to save on out-of-pocket costs for child care, it’s yet unclear how many more will be looking to sign up for longer hours or more days. The inclusion of professional development support may go some way to helping staff provide high quality, as well as high quantity, services. The modest investments here will likely be bolstered by findings from the ACCC and Productivity Inquiry reviews announced in the previous Budget.
The Government’s immigration focus is on creating certainty for skilled migrants to Australia and thus improving Australia’s attractiveness as a global destination, while generating revenue via significant increases to visa application charges.