Contraction or Stance?
The upcoming budget finds itself in a precarious position. With inflation remaining stubbornly high, there's pressure to tighten the belt and implement a "contractionary" budget. However, renowned economist Ken Henry warns against this approach, advocating instead for a "neutral stance" that neither adds to nor detracts from demand.
While acknowledging the need to address inflation, Henry believes a contractionary budget could push the already fragile economy over the edge. He argues that holding steady, similar to the Reserve Bank's approach, would be the most prudent course of action.
Treasurer Jim Chalmers seems to be on the same page, indicating a budget focused on the "near-term inflation fight" without explicitly labeling it as contractionary or expansionary. This likely involves further cost-of-living relief measures, similar to those implemented in the previous budget.
A "Future Made in Australia"
While the immediate focus remains on inflation, the budget also aims to lay the groundwork for a more resilient and self-sufficient future. The government's "Future Made in Australia" policy seeks to reshape the economy through initiatives like subsidies for local solar panel manufacturing and tax breaks for targeted sectors.
However, prominent economists like Ken Henry remain skeptical. They question the rationale behind these subsidies and express concerns about the burden they place on young workers. Henry advocates for bolder, more comprehensive reforms rather than the "incrementalism" that has characterized recent policy.
He warns that without addressing fundamental issues like productivity, Australia risks becoming a "banana republic," echoing Paul Keating's infamous warning. While his endorsement of a neutral budget might be welcomed in the short term, Henry challenges the government to adopt a more ambitious long-term vision to avoid a bleak future.