Predicting the 2023 budget priorities. Where will the money go?

Promises of responsibility and restraint

In an opinion piece published in The Australian newspaper in February, Dr Chalmers stated that addressing inflation – via responsible cost‑of‑living relief, dealing with supply chain issues and keeping spending under control – was the primary focus of the Albanese government. He went on to promise that the May 2023 budget would feature direct energy bill relief for households and businesses struggling with higher power prices, all while “delivering a responsible budget with spending restraint as its hallmark”.

The predicted expenditure focus

Expenditure increases are expected to be concentrated on energy, health and defence.

1.   Energy

Expect to see more funding for the transition to clean and renewable energy, to help Australia meet its commitment to greenhouse gas emissions 43% below 2005 levels by 2030, and net zero emissions by 2050. Expenditure could be increased on the government’s three key energy platforms: Rewiring the Nation, the National Electric Vehicle Strategy and the National Reconstruction Fund.

 Electricity bill relief as a budget feature has already been promised by the Treasurer.

2.   Health and aged care

The Australian Medical Association is hoping to see more funding to help GPs in general practice, to reform and upgrade Medicare, and to address significant capacity shortages in public hospitals and the ambulance service. Meanwhile, the NDIS is the second- fastest-growing area of government expenditure after interest costs on the national debt.

3.   Defence

With the potential for increasing threats from China continuing to dominate the thinking of defence chiefs, and the release of the Defence Strategic Review Report recently, the government had little choice but to react. And react it certainly did, in the form of the $368 billion nuclear-powered submarine program announced in March 2023, and more long-range missiles now promised on top of the already announced $1-2 billion for the US-made High Mobility Artillery Rocket system and Norwegian Naval Strike Missiles. Initial funding for these projects will need to be covered in the May 2023 Federal Budget.

How expenditure increases are likely to be funded

It should come as no surprise that a Labor government intends to fund some of its expenditure measures with a lift in tax revenue, not just with spending cuts in other areas. There appears to be three key elements to the government’s tax strategy.

1.   Proposed changes to tax on superannuation income

Potentially, wealthy individuals with superannuation balances over $3 million – an estimated 0.5% of the Australian population – will pay an additional 15% tax on their earnings on superannuation account balances exceeding $3 million from July 1 2025. This is in addition to the current concessional rate of 15%, which will still apply to superannuation balances.

2.   Increased tax revenue from multinational and other large companies

The Australian activities of large global organisations could well be targeted in line with the international two-pillar agreement to ensure that multinationals pay their fair share of tax and other recent tax changes directed at multinationals.  Oil and gas producers might see a projected increase in the petroleum resource rent tax (PRRT). Highly profitable major banks could be hit with a lift in the Major Bank Levy.

3.   Stage 3 personal tax cuts will probably still go ahead

The Stage 3 personal tax cuts from 1 July 2024 may still go ahead as promised during the election, but in a modified form.

The original plan would abolish the 37% marginal tax bracket and reduce the 32.5% marginal rate to 30%, while lifting the threshold for the 45% marginal rate to $200,000. These measures were designed to ease the effects of bracket creep, but the government may be tempted to tinker with the details, for example by retaining the 37% marginal rate or retaining the $180,000 threshold for the 45% rate.

Potential for deficit reduction

Government tax revenue actually increases during inflationary periods, in line with the dollar value increase in earnings – and therefore tax payable – by both individuals and businesses. Strong prices for Australian commodities like coal, gas, iron ore and wheat are also contributing to the boost. Given its promise for spending restraint, the government may use this hidden gift to reduce the budget deficit.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.