Budget 2022: What Jim Chalmers can do to combat inflation and avoid an economic crash
With a second federal budget on the way, Treasurer Jim Chalmers has a chance to introduce some novel economic fixes.
Australia has a brand-new treasurer — and a very unexpected brand-new economic situation. The second budget of 2022 stands as a moment when it is not just budget policy that should change but the whole machinery of how we run budgets.
There are plenty of reasons to think the way we’ve always done it might be less than optimal. (No, this article won’t be advocating for having two budgets every year, even though that’s like having two Christmases as far as I’m concerned.)
If you’re going to change what the budget does, the big question you have to ask is: what’s a budget for?
Why does the government make and announce all its spending and taxing decisions at once? The answer is: to try to balance decisions against one another. Make sure you get your priorities right. Don’t spend $100 million on defence if you’d rather spend it on health. That is important, and if spending and taxing decisions dribble out all year, a few from every cabinet meeting, you don’t get rigour on prioritisation.
But is that the most important function of a budget right now?
In an environment where inflation is running amok and the globe could be tipping into a recession, I’d argue the most important function of fiscal policy in 2022 is defeating inflation while stopping the Australian economy from crashing. Treasurer Jim Chalmers has said so too.
“Inflation is the primary influence on this budget,” he told the ABC.
By March next year, Australia could find itself with unemployment creeping up, the US economy crashing, and global inflation easing rapidly. In that case, an excessively restrictive 2022-23 budget risks making our economic future worse.
Alternatively, we could be in a situation of persistently growing prices in 2023. One year of 7% inflation is bad enough — two would be much worse. In that case, tax cuts and additional spending are terrible ideas.
But as the economic situation deteriorates, the next budget — and the important spending decisions that could rapidly help resolve our economic situation — will still be a long way away. It’s likely we will need fiscal fine-tuning. And the budget process doesn’t really allow for that as it stands.
Isn’t it the RBA’s job to worry about inflation and growth?
There’s an elephant in the room right now: monetary policy is slow.
The RBA has made a bunch of interest rate increases so far this year. These increases are needed now. However, they will continue to take effect over the next six to 18 months, potentially still squeezing the economy long after squeezing is needed.
There’s a mismatch. Fiscal policy can be fast and nimble but meets once a year. Monetary policy is slow and lumbering but meets each month. When the economy starts to go to hell, everyone remembers fiscal policy is really important in these scenarios and they start to scramble.
The mismatch is resolved in an ad hoc fashion. We get emergency cabinet meetings where they hand out $900 cheques or announce JobKeeper strategies, etc. The quality of some of these policies is… less than ideal (see: JobKeeper). Might it not be better to have these “ad hoc” strategies lined up, announced and understood in advance?
If X, then Y
This is where budget strategy could change. We already have “automatic stabilisers”: tax and welfare. When the economy is going badly, the government takes less tax and pays more income support. The reverse when the economy is going well. These are good and fine, but patently not enough. We could use another rank of stabilisers — call them semi-automatic stabilisers.
Given the RBA is likely to either under- or overshoot and can’t reverse course quickly, a major function of the budget should be to correct that. We need a state-contingent section of the budget. A section that says: “If X happens, we will do Y.”
For example: “If unemployment rises above 5% and inflation is back under 5%, we will spend another $3 billion on infrastructure.”
Or, “If inflation is above 7% in June 2023, we will raise income taxes by 0.5% on July 1.”
This would cause a kerfuffle initially — people fear change. But once people saw how it made the future easier to predict, it would reduce uncertainty dramatically. Business love certainty. It helps it invest with confidence, and that investment helps employ Australians and/or lower prices for goods.
All it would be doing is formalising a situation that already exists: the government makes announcements outside the budget process already, it just kids itself that the circumstances are extraordinary — and then forgives itself for the low quality of those decisions.
This article was first published by Crikey.
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