Budget: Black, white, and missing the mark on key issues

In a budget that left economists scratching their heads, the government made a firm commitment to the welfare of two very important Australians: Xing Qiu and Yi Lan, Adelaide Zoo’s resident giant pandas.

With $3.8 million allocated over five years (and another $3.8 million locked in for the next decade), the black and white icons of diplomacy have secured more government funding than many pressing economic issues.

Economists this week have criticised the budget for entrenching higher spending and persistent deficits while neglecting the nation’s long-term challenges.

The consensus is that Labor’s budget was ultimately underwhelming – crafted swiftly and strategically to bolster the party’s re-election prospects.

In a note published on Tuesday evening, AMP’s Shane Oliver said the budget is clearly aimed at three things: “getting the government re-elected; providing more cost-of-living support; and talking and shoring Australia up ahead of Trump’s tariffs and trade wars”.

Key measures – most of which had already been announced, except for the unexpected $17.1 billion in tax cuts over the next four years, which the opposition is vowing to block – included increased funding for Medicare and infrastructure, additional cost-of-living relief, measures to boost housing, and subsidies to support industries impacted by Trump’s tariffs.

But despite some positive, Oliver stressed “significant weaknesses” in the budget, including the government’s acceptance of structural budget deficits, which sees no money put aside for a rainy day over the forecast period.

He also warned that Labor has made the Reserve Bank’s job harder via the combination of new stimulus, the shift from surplus to deficit, and average 5.5 per cent year-on-year projected growth in federal spending to 2028–29 – all of which will boost demand in the economy.

“We don’t think it precludes more rate cuts, but it means rates will be higher than would otherwise have been the case,” the chief economist said.

Oliver also criticised the government for its unwavering ambition to become bigger, something, he said, comes at the sacrifice of productivity growth.

“Spending as a share of GDP is settling well above that seen pre-pandemic, locking in big government which risks slowing productivity growth. And the problem will escalate if Australia is forced to rapidly push defence spending up to 3 per cent of GDP costing $30 billion pa,” Oliver said.

He also criticised the government’s “Made in Australia” policy, one he sees as pushing for more protectionism.

“While ‘Made in Australia’ is popular, its reliance on protectionism and government picking winners has been tried and failed in the past with a long-term cost to productivity and living standards. We have no advantage in batteries and solar panels,” Oliver said.

CEDA chief economist Cassandra Winzar similarly noted that while easing financial stress on households is welcome, the cost-of-living measures are “poorly targeted” and fail to expand the economy’s capacity.

“The inflationary impact of all spending decisions must remain front of mind for governments, particularly given the current global economic uncertainty. Keeping inflation under control remains the best avenue to address household cost-of-living concerns over the longer term,” Winzar stressed.

She also pointed to the budget’s limited efforts to address the medium-term structural deficit, which is expected to total $179.5 billion over the forward estimates, with government debt to peak at 37 per cent of GDP in 2029–30.

“Long-term budget sustainability is critical to ensure that Australia is resilient to future shocks in the global economy. The current economic uncertainty and geopolitical instability heighten the risk of these shocks,” Winzar said.

Moreover, she said “tax reform remains the elephant in the room”, with minor tax cuts failing to address bracket creep or systemic issues, underscoring the need for meaningful, generational reform to drive productivity and equity for future generations.

“Tinkering around the edges can no longer be the standard,” Winzar said.

The budget’s structural deficit raised eyebrows across the board, with HSBC’s Paul Bloxham slamming it as the “primary challenge” in the government’s financial plan.

“The budget estimates that this structural budget deficit averages 1.0 per cent of GDP over the forecast horizon, even assuming a strong pick-up in productivity growth,” the economist said.

The CBA, in its post-budget analysis, similarly pointed out that instead of “banking a projected windfall from a stronger labour market and nominal economy”, the government has chosen to hand out new tax cuts – a move that has opened up the structural budget position to continued deterioration.

“Over the medium term, the structural budget position continues to deteriorate. And the risk is that additional spending pressure builds, and there is less room for parameter changes to improve the budget bottom line, particularly if nominal outcomes disappoint,” the CBA’s economists said.

While the economists stressed that the government’s fiscal position remains strong compared to peers, despite a significant rise in debt over the past 15 years, they warned that going forward, medium to long-term pressures on spending are expected to rise.

“The sustainability of the fiscal position will depend on the revenue side of the budget equation,” they said.