Economic Strategy: Chalmers Delivers on Government Services
About the author:
- Author name:
- By Michael Knox
- Job title:
- Chief Economist and Director of Strategy
- Date posted:
- 10 May 2023, 7:00 AM
A budget balance of 0.17% of GDP is better than no balanced budget at all.
If Jim Chalmers was an economist, he might have said that inflation was the biggest problem facing the Australian economy. If Jim Chalmers was an economist, he might have then talked about the importance of increasing investment. He might have said that by increasing investment, we increase the level of the capital stock per person.
As capital stock rises per person, then productivity rises per person. This higher level of productivity allows the Australian workforce to increase supply of goods and services and allow costs to fall. He might then have spoken about various programs that he had introduced to increase investment.
Jim Chalmers is not an economist. Jim Chalmers is a political scientist. So, Jim Chalmers gave a speech about increasing the supply of government funded services to various interest groups that support his political party. There’s nothing wrong with that, it’s just that his speech and his program did not address the issue of inflation and did not address the issue of productivity.
His signal achievement is that he produced a budget balance of positive $4.2bn in 2022-23. Last year the Australian economy had total output of $2,449bn. This means that his surplus was 0.17% of GDP.
Sorry, that is not a surplus. That is a borderline balanced budget by the smallest possible margin. Still, it is better than no balance at all. Chalmers’ budget is about delivering on government services. It is not about inflation at all.
Figure 1: Major Economic Parameters
Source: Statement 1: Budget Overview. Page 6.
In Figure 1, we see the major economic parameters, as provided by the Treasury. After 3.25% growth in 2023, growth is expected to fall to 1.5% in 2023-24. Growth slightly recovers to 2.25% in 2024-25. Slowing employment growth leads to a rising unemployment rate.
Unemployment rises from 3.5% in 2022-23 to 4.5% in 2024-25. After peaking at 4% growth in 2023-24, wages growth slows to 3.25% in 2024-25. Nominal GDP falls with declining inflation after growing by 10.25% in 2022-23. Nominal GDP is then down to 5.25% by 2025-26.
Figure 2: Terms of trade
Source: Statement 2: Economic Outlook. Page 74
The terms of trade, which measure the ratio of export prices to import prices, holds up better than previously thought. After a rise of 11.9% in 2021-22, the terms of trade still rise slightly by 1.5% in 2022-23.
This is followed by a sharp fall of 13.25% in 2023-24 and further decline of 8.5% in 2024-25. Still the terms of trade in 2024-25 are significantly higher than in 2016-2017.
Figure 3: Unemployment Rate
Source: Statement 2: Economic Outlook. Page 71
Unemployment in this cycle is now as low as it will get. Unemployment is expected to rise gradually to a level of 4.5% in 2024-25 and 2025-26.
Figure 4: Budget Aggregates
Source: Statement 1: Budget Overview. Page 7
The beneficial terms of trade allows Australia to have a borderline budget balance of 0.17% of GDP in 2022-23. This budget balance then slides to a deficit of 1.3% of GDP in 2024-25 and 1.3% of GDP in 2025-26.
Figure 5: Underlying Cash Balance as a Share of GDP
Source: Statement 3: Fiscal Strategy and Outlook. Page 96
It is the improving terms of trade that allow the budget balance to shift upwards in the budget for 2023-24, compared to the budget for October 2022-23. This improvement is caused by good luck, but we should take good luck when we can get it.
Conclusion
Jim Chalmers might have said that inflation was the biggest problem facing the Australian economy. He might have then talked about the importance of increasing investment. He might have said that by increasing investment, we increase the level of the capital stock per person.
As capital stock rises per person, then productivity rises per person. This higher productivity allows the Australian workforce to increase supply of goods and services and allow costs to fall. He might then have spoken about various programs that he had introduced to increase investment.
Jim Chalmers is a political scientist. So, Jim Chalmers gave a speech about increasing the supply of government funded services to various interest groups that support his political party. There’s nothing wrong with that, it’s just that his program did not address the issue of inflation and did not address the issue of productivity.
His signal achievement is that he produced a budget balance of a positive $4.2bn in 22-23. This means that his surplus was 0.17% of GDP. That is a borderline balanced budget by the smallest possible margin. Chalmers’ budget is about delivering on government services. It is not about inflation at all.
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