Chapter 1: What is the main topic discussed in this episode?
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A brand new federal budget will soon be released with expectations running high that although the energy supply shock has played havoc with economic forecasts, the government will be unveiling major reforms. Meanwhile, new analysis says that a rethink might be in order for how interest rates impact the labour market. Welcome to ABC Business Daily.
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I'm Carrington Clarke. And I'm Gareth Hutchins, ABC's business and economics reporter. Gareth, it's so nice to be down here with you in Canberra Parliament House. I've made the trip down for what is effectively Christmas in Canberra. There has been fevered speculation about what is going to be in this budget. There is a kind of buzz already here the day before it's announced.
A lot of stakeholders are making the trip to Canberra so they can get their hands on the budget during the lock-up. so that they can analyze and see whether or not they are winning or losing out of this particular budget. Going into this period, I think there had been a lot of speculation that Jim Chalmers wanted this to be a major reforming budget.
But then we had this war in the Middle East, this major oil supply shock wreaking havoc on the global economy, but also the forecast. But it does appear, doesn't it, that the government is deciding to go down the path of some pretty significant taxation changes, even though they face some pretty high political risk, particularly when it comes to seemingly breaking election promises.
What do you make of the current situation we're in and what the government might be unveiling tomorrow?
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Chapter 2: What major reforms are expected in tomorrow's federal budget?
That, yes, there's going to be a big focus on building more houses and doing what they can at the federal level to help facilitate that. But they also think that there needs to be change to taxation to make it easier for younger people to compete to buy a house, i.e. to take away some of the competitive advantage that investors might have when it comes to taxation.
Do you think that is the right economic move? I do.
And do you think politically it's going to pay off? I do. Both of those I agree with. I think politically will pay off as well just because the demographic numbers are there. It's very different from 2019 when Bill Shorten was trying to take these ideas to the electorate and Labor got really surprised by losing that election.
Chapter 3: How might the energy supply shock influence economic forecasts?
When it comes to housing, so Jim Chalmers has said that, yes, he wants to increase the supply of housing, but he also wants to change the composition of housing. And that's just an economist word for talking about the distribution. He wants to decrease the number of millennial and Gen Z renters and increase the home ownership rates amongst that cohort. And how do you do that?
You do that by changing the tax settings to incentivize new builds. not having investors come in and front run millennials at auctions to buy housing that already exists, but to encourage people to invest in brand new housing.
One of the things we don't know at the moment is it's almost now a given, it seems that there's going to be some reforms on negative gearing and capital gains tax. Now, it's possible, of course, the government's going to completely surprise us and do something different, but that seems obvious. There seems to be a question, though, about whether or not
these rules are going to be so-called grandfathered in, which means that people who have already purchased homes, whether or not they are going to keep the tax arrangements that they've already had, and there is even speculation that perhaps the rules won't change for another full year, that they will come in in 2027 instead of this financial year.
What do you make of potentially delaying it and also
this grandfathering question, particularly when it comes to equity and fairness, is that some people are suggesting already that that's effectively pulling up the ladder behind the older generations and means that younger people won't have the same advantages when they're trying to build wealth when it comes to investment properties, for example.
Yeah, these are all the political calculations that the government has to make. I think they'd have to have some type of grandfathering arrangements to make it saleable to the electorate. There's going to be a political pushback regardless If you don't have grandfathering in place, it will make that pushback even worse. So it's just all about these transitional arrangements.
As you say, do you delay it by a year? Do you space it out over a number of years? Former Treasury Secretary Ken Henry has said he hates the idea of grandfathering, just push it through, because he's been having this debate for decades now. But then, you know, he's not a politician who has to deal with the voters voting at the ballot box.
So that's going to be one of the major issues, the major flashpoints of this budget come tomorrow night.
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Chapter 4: What political risks does the government face with taxation changes?
And as you say, the Treasurer suggested this is a very different situation than what they were facing in early February. But do you think they have had the capacity to think through all the potential changes and how this could play out on the economy?
Yeah, they have. In their 2023 budget, there was a special chapter in there Treasury officials wrote where they Jim Chalmers had asked them to talk about what they think, say, the three biggest long-term trends are that are both hitting Australia's economy and is coming from Australia's economy that will be affecting everybody's lives over the next 20 years.
And they talked about the ageing population and the growth of the care economy, so aged care, social care, childcare. AI and technology, and then climate change and the energy transition. Now, this was three years ago. If you go back and read that chapter, we're still dealing with that now, obviously, because they're long-term trends that we're living with.
And so they have been thinking in these long-term terms for years. It's not that this has just come out of nowhere. Yes, Chalmers and Prime Minister Anthony Albanese have been hit by this war over in the Middle East, but it doesn't affect all the other long-term trends that were hitting the economy.
It's just that what's happening over there and the global energy shock that it's hit off means that it's almost going to hasten the pace with which we go through the energy transition here. I was speaking to a guy at a car dealership and he said that he's already got the next three months of his stock. So he can sit back and relax. So there's been a lot of interest in EVs.
So it's just hastening that transition in that point.
The other thing that obviously we'll be looking for in tomorrow's budget is where they are making cuts, because there is obviously also a debate around demand in the economy. We heard from the Reserve Bank governor about concerns. As she said, aggregate demand is what's going to matter for them when they're making their calculations about where to next with interest rates.
The government has already suggested that they will be taking that into account when they're fashioning this budget. We know that there are going to be substantial cuts to the NDIS. On the other side, we know defence spending is going to be going up. It is difficult for them to find the savings to offset that massive increase in defence spending, isn't it?
Hugely, especially when the population is demanding it. We have an ageing population. So that care economy, the growth in the care economy is not going away. The growth in aged care workers is not going away. So where do you find it? They've managed to find some cuts in the NDIS that were $15 billion worth over the next four years.
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Chapter 5: How is the budget tailored to address the concerns of younger generations?
And the reason it did that is because highly indebted households were thinking, how am I going to pay for these higher interest rates? So they took on second or third jobs, they took on more hours, or the partner in their house who wasn't working entered the labor force. And it was so significant that it has challenged the central bank orthodoxy.
And what does that potentially mean when it comes to setting interest rates? I mean, part of the difficulty for the Reserve Bank, obviously, the traditional trade-off has been, well, if you're hiking interest rates to try to deal with higher inflation, you know it's going to have a certain impact.
The assumption was that it has an impact on the employment market where it leads to higher unemployment, lower economic growth. Does this challenge that basic assumption, do you think?
Yeah, so an increase in labour supply following a rate hike could dampen the RBA's contractionary impact on output. So the RBA wants to raise interest rates to reduce output. But if people are coming in because rates have been lifted, it could reduce that impact on output.
But on the other hand, it could actually amplify the push down on inflation because you're bringing in all these people into the labour force and it's putting downward pressure on wages.
Now, these were very particular times, weren't they? This was a time when the labour market was very tight. It was COVID. Everything was a little bit unusual.
A lot of demand. A lot of demand. A lot of demand. Yeah, from employers. There was still a strong demand there. So you can imagine a situation where, a normal situation, where there wasn't such a strong amount of demand, maybe lifting interest rates wouldn't induce that increase in labour supply.
So in a sense, that increase in labour supply could be met because there was strong demand from employers that was already existing. So it is specific to the Australian example in 2022, 23, 24. But at the same time, they say that this still holds some lessons for advanced economies more generally, particularly countries where variable rate mortgages are so prevalent as they are in Australia.
Now that's another thing, because in Australia, About 70% of households with mortgages are on variable rates. Where your interest rate moves when the reserve bank hikes. It's basically indexed to the cash rate. So the cash rate goes up. The major banks very quickly push the higher interest rates over to you. You see them quite quickly.
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