The five key pressures on the budget – and how they’ve blown out over time
By Shane Wright
They were painted as the five fiscal horsemen of the budget apocalypse – aged care, the National Disability Insurance Scheme, defence, health and the interest on government debt.
Combined, Josh Frydenberg’s final budget forecast them to account for almost 35 per cent of total government spending in 2022-23, or $225.6 billion. By 2024-25, Frydenberg predicted their cost would climb another $20 billion to almost 37 per cent of the total budget.
How have Jim Chalmers and Labor addressed the five key budget pressures?Credit: Marija Ercegovac
Two years ago, before their first budget, Treasurer Jim Chalmers and Finance Minister Katy Gallagher warned of these five spending pressures. On Tuesday night, they will use their third budget to reveal whether the horsemen are running free or have been hobbled.
In a mid-year update, the two ministers delivered some insight into how the spending rodeo was going. There had been substantial changes to the forecasts for the coming 2024-25 financial year.
The NDIS
Spending on the NDIS had been predicted in early 2022 to hit $42.9 billion. Ahead of Tuesday’s budget, that forecast had been pushed up to $47.3 billion, an increase of more than 10 per cent.
Chalmers has signalled there will be “movement” in NDIS spending, reflecting the efforts the responsible minister, Bill Shorten, has gone to over the past two years.
“Our highest priority in the NDIS is making sure we’re providing the services that people need and deserve and keeping faith with the design of the system,” Chalmers said last week.
“But in order to do that we need to make sure we’re getting value for money and that it’s sustainable into the medium term and into the longer term as well.”
Aged care
Of the five horsemen, the biggest blowout has been in aged care. In the mid-year update, spending in this area had been revised up by $4.8 billion to $36.2 billion.
The government is sitting on a series of contentious recommendations around aged care. The responsible minister, Anika Wells, has argued there’s strong case to increase the co-contributions of wealthy retirees towards their care. But with so many other fiscal fires to fight, aged care is unlikely to be brought under control on Tuesday.
Health
Outside social welfare, health is the largest expense for the federal government. This increased during the pandemic and continues to push up.
At the mid-year update, it was on track to hit $110 billion in 2024-25, or 3.8 per cent higher than had been predicted in early 2022.
The government has already signalled extra health spending, including $49 million on Medicare rebates for long gynaecological appointments to help women suffering from endometriosis and $227 million to establish 29 urgent care clinics.
Interest on government debt
One area where spending is coming under control is debt interest. Better budget outcome, such as the record $22.1 billion surplus in 2022-23 and a likely surplus this financial year, has reduced overall debt by more than $200 billion than expected.
Global interest rates have picked up but are still about where they were late last year. Combined, this has meant forecast interest repayments have actually fallen over the past two years.
Defence
The final horseman is defence. While defence spending is being pushed 6 per cent higher than predicted by Frydenberg, the government has not given it a blank cheque. Tuesday will confirm $22.5 billion in what Gallagher describes as repriorisation – making space for extra spending by cutting back in particular areas.
Apart from the imperative of trying to bring spending in these five areas under control, Chalmers and Gallagher face other tests.
The inflation dilemma
The largest has been inflation. Blowouts in the cost of infrastructure, for instance, forced the government into cutting spending to the states last year in a move that antagonised many premiers.
The budget will contain extra funding to help fit-out the Western Sydney International Airport.Credit: Janie Barrett
Inflation can be worsened through government spending or handouts.
That’s why Chalmers has been keen to argue that annual real spending growth will be just 1.4 per cent between 2022-23 and 2027-28. By choosing 2022-23 as the starting year, Chalmers included a near 5 per cent drop in spending that was due to a range of COVID-era measures coming to an end.
Spending in the current year was forecast to increase by 4.7 per cent over the 2022-23 level.
And while too much spending can add to inflation, cuts in the wrong areas can hurt the economy and push up unemployment.
Acknowledging that point, Chalmers has said he “won’t be slashing and burning in the budget because we know people are under pressure and the economy is weak”.
A host of programs put into the budget by the Morrison government has made the situation more difficult, as those programs only had short-term funding commitments but were expected to be ongoing.
In her first budget, Gallagher found $4.1 billion in ongoing programs for which no money had been set aside. Last year it was another $5 billion.
This year, there’s $15.4 billion in what Gallagher has termed “unavoidable spending”.
That includes cash to fit-out the new Western Sydney International Airport and money for a Frydenberg-era program to provide the aged care sector with palliative care services.
As much as chairs and lights will be vital to Sydney’s new airport, keeping the budget bottom line may be more important to those hit by inflation.
AMP chief economist Shane Oliver argues that despite the rhetoric, Chalmers and Gallagher continue to oversee an “upward drift” in government spending.
“In the December mid-year review, federal spending as a share of GDP was already projected to average 26.2 per cent over the long term, which is well above the pre-pandemic average of 24.8 per cent,” Oliver noted.
The fiscal horsemen still look like they’re feeding on a good paddock.
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