This piece was originally published in the AFR. Click here to read.
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Budget must spend political capital on economic reform
The challenge to the major parties is there. Both of them could work with independents to guide meaningful reforms through parliament.
Mar 19, 2025 1.23pm
Budget night can be a night of celebration. Where governments say they are by behaving like Santa, sprinkling money like fairy dust over a range of worthy issues and constituencies. Priorities communicated by dollars committed.
This cannot be one of those budget nights.
Instead, the message of this budget, and the budget reply, should convey priorities not by the dollars committed, but by political capital being committed to the hard reform that the economy needs.
We can’t spend our way out of our current situation. Government spending has reached 27 per cent of national income, with the fastest growth rate in half a century. While inflation has moderated and unemployment is low, too many indicators are pointing to red. Labour productivity is back at 2019 levels, and per capita income growth has gone backwards since the pandemic. Meanwhile, fracturing global alliances are threatening to undo decades of collective economic co-operation and security.
Both the budget and budget reply need to set an agenda towards a better future. An agenda to increase the competitiveness of our businesses, set stronger guardrails for government spending and outline an ambition to reform our tax system.
To unlock business potential, we need to make it easier for our businesses to grow and thrive. They need better regulation and less political risk to unlock innovation.
There are three priorities for better regulation. Firstly, prioritising passing an overhauled Environmental Protection and Biodiversity Conservation Act that streamlines approvals to businesses, while better protecting the environment. Secondly, industrial relations reform that focuses on unlocking productivity (and thus wage growth), starting with overdue award simplification. And finally, a focus on key sectors with languishing productivity, particularly the construction sector and the care sectors.
Reducing political risk means committing to the energy transition on a lowest-cost basis and giving business certainty to invest rather than the climate wars, which only serve to guarantee higher prices.
Government spending has increased sharply in the past few years. This cannot be sustained.
To recentre government spending, we need to bring back sensible fiscal rules, including limiting government spending growth at or below gross domestic product over the cycle. We need a parliamentary committee to end the opaque, creative accounting tactic of “off-budget” spending that has suited both of the major parties.
This will require a rebalancing and prioritising of government spending. Two areas where spending will need to be directed are housing and defence. Government investment in promoting housing supply – through social housing, incentives for states to ensure planning does not get in the way, and support for enabling infrastructure – will take time but can help lower prohibitively high housing costs.
We are going to need to boost defence spending faster than expected to deal with the changing world. This also means properly scrutinising existing spending.
To afford growth in these areas we will have to pull back in other areas. Two areas where spending needs to slow down are the National Disability Insurance Scheme and large infrastructure projects.
The NDIS is a proud achievement, but it simply cannot retain public support and keep growing at 8 per cent per year. Big public infrastructure projects are often based on weak business cases, and are crowding out housing investment. They are already $32 billion overspent because of lack of capacity.
Tax reform
Finally, this budget and budget reply should signal a commitment to tax reform. We face significant challenges in Australia – a younger population unable to get ahead, sluggish productivity and business investment, and an urgent energy transition. But by ignoring the tax system we are, at best, ignoring one of the greatest policy levers we have at our disposal and, at worst, making the other solutions much harder and costlier to implement than they should be.
Unfortunately, the chances of seeing such a reform agenda laid out next week are slim to none. We have an election contest between a prime minister trying to hold on by doing nothing bold and an opposition leader counting on discontentment alone to get them over the line. It’s hardly shaping up as an inspiring campaign.
Yet at the same time, the majors, and some of the media, are publicly claiming that the independents – not the major parties’ utter lack of ambition – will hinder reform in the next term of parliament.
This ignores the record of independents in this parliament.
Independents have put tax reform back on the agenda, and have advocated for indexing tax brackets, protections to end pork-barrelling, and ways to make it easier for small businesses to employ people. Independents have also resisted some of this government’s worst economic ideas, such as the taxation of unrealised gains.
In fact, the dearth of economic reform over the past 20-odd years has occurred mainly under majority governments.
The challenge to the majors is there. Both of them could work with independents to guide meaningful economic reform through parliament. They just need the guts to try.