ANALYSIS: 2022 federal budget a lost opportunity for smaller deficit, lower taxes

By Doctor John Humphreys, Australian Taxpayers’ Alliance Chief Economist

The 2022-23 Australian federal budget was another lost opportunity, full of half measures and cheap political handouts.

While the government boasts it has decreased the budget deficit, the truth is that the deficit should already be much lower at this stage in the economic cycle. It also loudly proclaims it is cutting taxes, but the fuel tax reduction only lasts for six months before the government will return the tax rate to exorbitant levels. Details in the budget papers confirm a significantly lower budget deficit is within reach—and would be achievable even if the fuel tax cut were made permanent—if the government could only resist introducing hundreds of new spending measures every year.

The government announced a $78 billion deficit in the 2022/23 budget year, and a combined deficit of $225 billion over the coming four years. There is no surplus in sight. These are crazy high numbers, and they are irresponsible given the current stage of the economic cycle with growth rebounding. These never-ending deficits contribute to net debt levels that will soon eclipse $1 trillion, and then continue growing at an unsustainable rate.

Balancing the budget can be a difficult political task. Good fiscal policy would demand the government cut back on wasteful spending to reduce deficits, but weak political leaders are generally scared to cut government spending at all for fear of the inevitable complaints. From the hundreds of new policy measures announced in the budget, not one of them is a savings measure. The lack of responsible political leadership (from both sides of politics) is a serious ongoing problem in this country.

The frustrating detail about this budget—much like the last budget—is that there was a golden opportunity to simply allow rebounding economic growth to push the deficit down naturally, without the need for any hard decisions. If the government had simply sat on their hands for the last 12 months and introduced no new policies, the budget deficit would have passively shrunk to $54 billion in 2022/23 and $180 billion across four years.

The one redeeming feature from the budget was the reduction of the fuel excise, which the Australian Taxpayers’ Alliance has long supported. Unfortunately, this tax relief is short-lived, with the fuel tax rate scheduled to bounce back to its full rate in September this year.

Advocates of high tax will insist that the government needs this revenue to help balance the budget, but a permanent cut in the fuel excise (along with no other new policy) would have left us with a budget deficit of $59 billion in 2022/23 and $198 billion over the coming four years. This is already significantly better than the budget deficits announced on budget day and the result would be better still if the government found the political courage to cut back on other wasteful spending.

Despite the rhetoric, this was another tax and spend budget. The sole good policy (the fuel tax cut) is temporary, while most of the hundreds of new spending measures are permanent and have a much larger cost on the budget. The budget papers explicitly admit that new policies will result in tax increases over the coming years. 

What the budget papers don’t admit is the insidious impact of ongoing bracket creep, which represents an automatic and hidden tax increase of approximately $10 billion every year. Bracket creep occurs when normal wage increases shift people into higher tax brackets, resulting in a higher average tax rate for the working population and extra revenue for the government. This hidden tax increase could be removed if the government was willing to index tax brackets to account for inflation. Unsurprisingly, both sides of politics prefer to maintain the status quo because they relish the opportunity to secretly squeeze an additional $10 billion from the working public every year. The government hypes up the occasional minor (and often temporary) tax cut but these are nearly always offset by ongoing bracket creep, which is one of the reasons the size of government continues to grow. As detailed in the table below, inflation-adjusted government spending per person has more than tripled over the last 50 years and government revenue has increased by nearly as much. 

The 2022-23 budget was not a disaster but it was a disappointment. The government missed the opportunity to shrink the deficit to manageable levels, missed the opportunity to introduce permanent tax cuts, and once again missed the opportunity to pursue any meaningful microeconomic reform to help drive long-run productivity. The era of weak and meek political leadership continues and Australia continues a slow decline into stagflation.