After months of ongoing political campaigns, discussion and debate, the Federal Election is finally over. As of today, the Australian Labor Party has earned enough seats (76) in parliament to form a majority government. Therefore, Australia has a new Prime Minister: Anthony Albanese. To many, this signifies a new era for Australian politics. To HSC Economics students, this means a new Budget. In this fortnight’s article, we will explain what happens to the Federal Budget when the Federal Election result interferes with the proposed policies. Furthermore, we will analyse the global inflation issue, as energy prices in Australia soar and fuel prices return to their pre-tax cut levels.
What will happen to the Federal Budget now that there’s a new government?
Everyone wants to know what happens to the Federal Budget when a new Federal Government comes to power. Originally, the LNP Coalition delivered their 2022/23 Budget on the 29th of March, 2022. This included several key policies, such as the fuel excise relief and the cost of living offset, which have had immediate, albeit mixed implications for Australia’s economy. However, since the ALP has come to power, a revised Budget must be proposed. The revised Budget includes greater “investment into childcare, education and training, as well as cleaner and cheaper energy”. Yet, the revised Budget will cost an additional $7.4 billion, with $18.9 billion in new spending and $11.5 billion in savings.
So what does this actually mean? Will Labor introduce a completely different Budget? What will happen to all the policies introduced by the LNP back in March? Since many of the policies introduced by the LNP have already been introduced and had immediate, short-term implications, it is likely that the ALP will simply ‘amend’ the previous Budget. Understandably, the new Federal Government has a different focus and revised economic objectives, so they will adjust the previous Budget to meet their needs. Minister for Finance, Katy Gallagher, has explained that their revised Budget focuses on driving economic growth and boosting productivity.
In Australia, productivity has generally increased, shifting from a low of 99.8 (measured by output produced per unit of input of labour) in mid-2019 to 103 in early 2022. Yet, Australia’s productivity remains low relative to other countries. Australia’s productivity is estimated to be 20% less than the USA, which is a considerable difference given the stark differences in minimum wage(s).
The latest economic growth forecast for Australia shows that the Australian economy grew by a mere 0.8% in the March Quarter, which appears to be below-average and certainly below the 3-4% target range, as set out in the Mortimer Report (1997). However, this goal is to be achieved per annum (i.e. per year), meaning quarterly information is irrelevant if we fail to account for the long-run trend. Over the past year, growth has reached 3.3% according to the ABS, meaning the Australian economy is on track to achieve the objective. Originally, Reuters estimated Australia’s quarterly growth to be 0.5% for March, with 2.9% growth over the year. Yet, Australia has proven itself to be resilient, as household consumption grows by 0.8% and inventory stock rose by 1% despite supply chain disruptions.
Right now, we will just have to wait until the ALP releases their amendments. We are yet to find out which policies will be revised, which policies will be scrapped and which policies will be introduced. However, we can make some predictions. Gallagher has announced that the petrol cut won’t be extended beyond its 6-month period. Treasurer Jim Chalmers has also expressed disdain for the excessively high level of debt that the new Federal Government has inherited, so it is likely that the revised Budget will address that issue imminently.
The global inflation crisis aggravates electricity and gas prices within Australia
Since the outbreak of the Russia-Ukraine War, global supply chain issues have become increasingly prevalent. Petrol prices have risen globally and now, in Australia, other commodities are suffering from similar price spikes. The Russian invasion of Ukraine culminated in Europe weaning off Russian gas, oil and coal, leading to higher international demand for the commodities. Over the weekend, EU leaders introduced their plans to ban 90% of all Russian oil imports by 2023. With Poland and Germany pledging to end pipeline imports and the EU banning oil that arrives by sea, almost 90% of total Russian oil will be blocked from entering the EU. The UK has also pledged to phase out Russian oil by the end of 2022, despite receiving 8% of its oil needs from Russia.
In Australia, the price of commodities relies entirely on global demand. Yet, global demand also depends upon the long-term contracts that Australia has in place with other countries. For gas exports, long-term contracts allow Australia-based gas fields to fund development, production and continue their operation nationwide. Since many countries are beginning to redirect their attention to other countries for gas in particular, Australia has become a primary target for low-cost gas exports. In fact, many Australian gas exporters have received prices four times or more higher than normal. As a result, domestic consumers are unable to access low-cost gas. Whilst Western Australia retains 15% of total LNG exports for domestic use, this policy does not apply to the rest of Australia. Thus, Australia is in the midst of a major crisis.
Over the last two years, spot prices for gas have risen by 529%, rising from an average of $4.83 a gigajoule to $30.38. This only applies to Australia’s east coast. In Western Australia, the has only risen by 160%, reaching $5.55 this month. This is due to the (1) expiry of long-term contracts in Western Australia, (2) reduced production in certain facilities and (3) the aforementioned 15% retention tool.
To combat this issue, many have requested that the new Federal Government introduces a “windfill tax” that applies to companies who have profited from the Russia-Ukraine War. This would include several major gas companies within Australia and is a one-time tax imposed on certain companies. In the UK, the government announced their 25% windfall tax on oil and gas companies to assist those suffering from soaring energy costs. Whilst many consumers are yet to fully realise the implications of this issue, it will be a big focus of Treasurer Chalmers over the next couple of weeks.