Labor's October budget presents Treasurer Jim Chalmers difficult choices

Budget season is in the air!

Already there are some serious hints this 'mini' budget will cause a major stir.

Treasurer Jim Chalmers' speech this week outlined the need to make difficult decisions with this budget to pay for cost blowouts in the NDIS, defence, debt servicing and hospital funding.

Journalists are seeing this as a sign the government is considering dropping the stage 3 tax cuts in this budget.

To be fair to the government, these indications may simply be some in the media and the policy community confusing their hopes with government thinking on the matter.

The ALP committed to these tax cuts during the election campaign, and after coming to power - although with varying degrees of enthusiasm in the commitments, it must be said.

It's worth parsing these cost blowouts in some detail. While it's true these costs are rising - and must either be reined in or paid for - there is no justification to claim circumstances have materially changed for the worse since the election.

In fact, the opposite is true: the government now has far more revenue than expected.

Let's start with the NDIS. As far back as 2012, my then colleague Andrew Baker was warning cost projections for the NDIS were way off the mark. In fact, citing work by the Australian government actuary he highlighted costs were likely to be double the initial projections when the scheme was first proposed.

From there, comparisons with other similar schemes suggested costs would grow at more than 6 per cent. And this is before you consider the impact of our inflation crisis. The blowout in costs was basically built into the design of the scheme. It has not arisen since the election.

The cost increases in defence have their roots even further back than 2012.

In 2009, then prime minister Kevin Rudd outlined an ambitious Defence White Paper that would significantly scale up Australia's defence capability. While it would be fair to characterise this at least in part as driven by domestic industry concerns (particularly in South Australia) the plan was clearly designed to confront the rise of a more aggressive China, and less capable United States.

Exactly the scenario that has been playing out over the past 18 months.

Yet successive governments postponed implementing the major components of the plan. Decisions were delayed and then delayed again - particularly in respect of the centrepiece of Rudd's plan, 12 new submarines. Debt servicing costs increasing was perhaps the most predictable consequence in the history of politics; and that's from a very strong field of contenders.

For years now, those same people who have been claiming the stage 3 tax cuts were unaffordable, have been egging the government on to borrow as much as it could, because interest rates were so low.

But interest rates could not possibly have been expected to stay at or near zero forever. And when they rose, the cost of government debt would rise right along with it. This error has been compounded by the enormous cost of pandemic stimulus payments - which were all funded by debt.

But this is the third budget to be released since the 2020-21 budget outlined debt would soon exceed $1 trillion. And not only has the revenue situation improved pretty much at every budget since then, the 2022-23 budget prior to the election shows $100 billion improvement in total debt on the projections in 2020.

The increases in health spending should also not be a surprise. The Treasurer cited an increase of 6.1 per cent in hospital costs. While it's not immediately clear if this is a real increase or a nominal one, prior to the pandemic the Australian Institute of Health and Welfare noted government health expenditure was growing at almost 3.5 per cent per year in real terms (in the 5 per cent to 6 per cent range nominal).

And we have just gone through a pandemic. That this would result in ongoing funding increases in health should not be unexpected or a recent shock.

This leaves just aged care, the one area where there has at least been a significant development in the past two years: the royal commission.

So the government may claim unanticipated spending in aged care. You know ... unanticipated as long as you ignore the fact the royal commission delivered its report at the beginning of March 2021 - more than 14 months before the election - and that it was clear prior to the calling of the royal commission in 2018 there were issues to be addressed in the sector.

When considered in even this level of detail, it is clear these expenses would be political excuses for changing course, not genuinely unanticipated fiscal events.

Of course, a lot of this is really about the politics.

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It was once standard practice for the incoming government to shake its head at the unexpected mess on taking office, and quickly jettison some of its less popular and more expense promises.

But the charter of budget honesty, and the rise of the 24-hour media cycle, has meant this ploy has not worked for some time. Julia Gillard was skewered on her "no carbon tax" promise. Tony Abbott had no luck with his 2014 age of entitlement budget.

This government, like many before it, may be convinced this time it's different and its supposedly superior political skill will carry the day. But it would be quite a bold gambit indeed for a new government to risk it all at this stage.