Chalmers wants you to immediately forget this budget update ever happened

This may well turn out to be Labor’s final budget update until it faces voters early next year.

That’s one takeaway from Wednesday’s Mid-Year Economic and Fiscal Outlook, even though it’s a document bereft of even the slightest whiff of pre-election razzamatazz.

Which is what makes this edition rather strange by the standards of budget politics.

It has none of the splashy, headline-grabbing spending or policy show business voters would normally expect at this autumnal stage of the political cycle.

Silent on anything hefty or politically challenging, it has no real fresh thinking on how to spur economic growth, boost productivity or encourage investment in the private sector.

And it’s largely bad news about worsening budget deficits and a sluggish domestic economy kept alive by government spending.

In other words, a fairly bleak affair. At this point in time, Labor is not in the business of making itself a large political target for the opposition with bold new ideas.

If the treasurer has his way, this update will immediately vanish from the public’s awareness.

Bad budget news is bad politics.

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One big Debbie Downer

The numbers in the Treasury update paint the picture of households ground down by falling living standards, our biggest trade partner ordering less of our iron ore and business investment in a freeze.

Deficits stretch over the horizon, which is where the mega-commitments made by politicians to Australians lurk most ominously.

Things like AUKUS and the energy transition (which both sides of politics have committed to, just in different ways, and none of them are cheap) as well as more services via the NDIS and for housing.

That’s not the kind of backdrop anyone in politics wants voters to dwell on for too long. Not least because it all implies taxpayers have some hefty bills coming at them, in one way or another. And that’s all just one big Debbie Downer for voters already under the pump of high mortgage rates and still-rising costs.

Another big reason there isn’t more sizzle on show is that the underlying budget story does not lend itself to casting more money around.

For one thing, the government is already doing that in spades — via energy bill relief and a swathe of new outlays in what the treasurer likes to call the “care economy”. Sectors like the NDIS, child care and aged care.

These are things the Albanese government believes voters will thank them for and grant them a second term to bed down. It’s at the heart of Labor’s re-election strategy: creating a bigger role for government in a broadening array of areas once the sole preserve of individuals.

But it’s the scale of the spending that exposes the real point of sensitivity for Chalmers, who knows he stands accused in the minds of many voters for running the economy too hot for the Reserve Bank of Australia to bring down interest rates.

On any measure, Chalmers is spending big

He used much of his press conference to compare his spending to the previous government’s record, which was pushed sky-high by the pandemic relief Labor supported while in opposition.

It’s a bit like taking the daytime temperature on a scorching January summer’s day and comparing it to the July average to claim evidence of global cooling.

On any objective measure, the treasurer’s own spending is on a tear, rising 5.7 per cent in real terms this year and 2.8 per cent in 2025-26.

The cumulative 8.5 per cent rise over two years has no analogue in the budget record since at least the mid-1980s — at the peak of Paul Keating’s “banana republic” warnings — outside of exceptional periods of high distress.

Specifically, the COVID-19 pandemic, the 2008-09 global financial crisis, the early 2000s dot-com collapse and the early 1990s recession.

Chalmers defends the increased spending on early childhood education, the age pension and more money for Medicare as things “no responsible government could deny”.

“Critics should nominate which spending is inappropriate,” he says. “It would be madness in fairness and economic terms to slash and burn in the budget.”

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Whether voters agree with him will be one of the central questions of the coming election.

Labor has prioritised spending on many important measures that it believes Australians should have.

But there’s a downside for the government, which is that the spending will need to be paid for — absent another commodity boom.

The government has made much of its “stage 3” income tax cuts that came in on July 1.

But voters will need a microscope to spot the impact of those tax cuts in the budget numbers.

MYEFO papers show taxation receipts as a percentage of GDP edging down from 23.7 per cent in 2023-24 to 23.4 per cent this financial year.

They then go back up to 23.5 per cent, where they are forecast to remain until 2027-28.

This is materially higher than the record of the past 15 years or so, when tax-to-GDP averaged just under 22 per cent of GDP.

In today’s dollars, that’s an extra $45 billion in taxes Australians will pay every year.

“It doesn’t come from the sky, Australians have to pay that bill and they pay it either through higher inflation, higher taxes and/or higher interest rates,” shadow treasurer Angus Taylor says.

The goal: maximum election flexibility

Chalmers and Finance Minister Katy Gallagher have delivered a MYEFO that gives their boss, Anthony Albanese, maximum flexibility to call an early election.

For one thing, it would have been politically foolish to put out this week’s budget followed by the legally required “pre-election” budget update once the election is called and allow too much of a gap in numbers between the two documents.

By throwing all the bad budget news into Wednesday’s update, Labor can pull the election trigger knowing it can’t be accused of hiding any “black holes”.

Furthermore, it’s socked away $5.5 billion into a hollow log reserved for “decisions taken, but not yet announced”. Expect much of that to be deployed as voters make up their minds.

How some of it gets spent will no doubt also depend to a large extent on whether the Reserve Bank cuts interest rates in the opening months of the year.

Politics and economics are largely about trade-offs.

Labor will be praying its latest budget update does enough to clear governor Michelle Bullock’s runway to cut mortgage rates.

Without that, the government may be in trouble when voters go to the ballot box.