Recurring themes: Define the core problem

Matthew Drennan

4 May 2026

Commenting on economic policy at the moment is a bit like watching re-runs of Friends. It garners your attention, but in the end, you’ve seen all this before.  Part of the issue is a preoccupation from all parties with playing politics and fiddling around the edges rather than defining the core problem and seeking to address it. It requires a candid admission of what we face in Australia as a starting point:

• Immigration rates are too high for the economy to cope with. It is not really a housing supply issue per se, but the costs of excessive red tape, a stranglehold on labour supply by unions and rising materials costs which exacerbate an already bad situation.
• AI related job losses at Meta and Atlassian following those at Square and Afterpay are the canary in the coal mine. Some banks are beginning staff cuts, with many more to come. The pace of adoption makes this very different from previous industry revolutions we have seen.
• Defence spending remains woefully inadequate and procurement practices are poorly directed and mind-blowingly inefficient.  No amount of fiddling the basis of comparison with other nations will address this.
• The major budget issue facing the Federal Government relates to unsustainable levels of spending (both on and off budget). It cannot be argued that with expenditure at a record high of 27% of GDP and debt approaching $1 trillion dollars that what we need to fix the situation is more revenue (taxes).
• There are valid arguments about intergenerational inequity, but this is being used as a smoke screen to increase taxes. Sure, asset appreciation is taxed too lightly and income too harshly. But this needs to be dealt with holistically, not by tinkering with the capital gains tax discount or attempting to tax unrealised gains in Superannuation as was mooted previously.
• The most immediate budget issue facing the Government is not one of its own making. The war in Iran has supercharged inflation and crippled supply chains. But guaranteeing that liquid fuels are available for motorists and industry is a supply side issue, it cannot be solved with feel good cuts to excise rates. In fact, this makes the immediate problem worse by strangling the price signal.

To their credit, the penny seems to have belatedly dropped for a number of senior members of the Government, at least on some of these issues.

The NDIS money-go-round

The biggest runaway element of spending in the budget, the NDIS, has at last been called out as unsustainable. Health Minister Mark Butler has recently acknowledged that the growth in spending must be cut from its current level of 10% per annum to 2%.  This is a welcome acknowledgement of reality. The combination of measures cited to achieve this are:

• Removing 160,000 current participants from the scheme by re-assessing all participants and weeding out those with the mildest of disabilities.
• Cracking down on unscrupulous providers and ensuring that the fees being charged to the scheme provide value for money for the taxpayer.

However, there are several obvious questions and challenges with is approach. Will the Government have the stomach to kick so many current participants off the scheme? If they do, will they just be redirected to some other taxpayer funded program which provides similar services (and costs)? What are the criteria for assessing current participants to decide who will no longer be eligible for NDIS support? What will this assessment process cost?

On the provider side of the ledger, the questions and issues are no less challenging. Why was an assessment and registration process for providers not set up in the initial plan? Will those providers who have been defrauding the Commonwealth be pursued and ultimately prosecuted? Will the schedule of services provided and fees charged for them be reviewed to better align it to reasonable needs while cutting out what appear in some cases to be extravagant claims? Will there be ongoing audits of providers to ensure that the current sloppy mis-managed system does not resurface in the future?

It is difficult to be sanguine about achieving the goal of reducing expenditure growth in this program to 2% in just 2 years given its woeful track record to date.

Don’t mention the war

As John Cleese’s famous character Basil Fawlty noted when German guests come to stay at his hotel, “Don’t mention the war. I mentioned it once, but I think I got away with it .”

After initially seeking to deal with a liquid fuel supply problem caused by war in the Middle East using temporary cuts to the excise rate, senior ministers have been running around the region attempting to shore up supply. This appears to have been a successful stop gap measure which is reassuring.

Longer term, there is talk of funding a third refinery in Australia and increasing storage facilities onshore to double our supply buffer of diesel and petrol to 60 days. These are both sensible moves to address market failure in critical inputs. Less convincing have been Government investments in “Future made in Australia” programs (a bit of déjà vu which failed to achieve anything substantial first or second time around) and investments in Lithium miners which surely should be able to stand on their own two feet as the world moves to electrify more vehicles. I would also argue that bailouts for the Whyalla steelworks ($2.4b), the Boyne aluminium smelter ($2b) and the Nystar lead and zinc smelter (600m) are questionable at best.

Oils ain’t oils

At the risk of being repetitive, it doesn’t matter how many times you coo reassuring messages to the camera, don hard hats at various worksites, or emphatically state that we wouldn’t be so vulnerable if we accelerate our net zero ambitions; you can’t alter the facts. Viz:

• Diesel, petrol, gas and coal will remain core fuels in our economy for at least the next decade and currently provide north of 85% of our overall energy requirements. They will remain critical in mining and agriculture as well as electricity generation. This is a fact that the Government appears to be belatedly waking up to. Never waste a good crisis I guess.
• Wind and solar power are not free and in fact are relatively expensive even before environmental trade-offs are considered. They cannot replace liquid fuels in many industries in the foreseeable future.
• Our supply chains for liquid fuels, fertiliser, plastics and much more remain extremely vulnerable. Even if we could move away from petroleum for private transport and industry, what happens to the supply of plastics, building materials, fertiliser, many of our pharmaceuticals, some fabrics, asphalt, and detergents? These all come from biproducts of petroleum. Not sure that is an easy one to solve.

The final word  – Our upcoming budget

• The Federal budget is in poor shape almost entirely as a result of excessive spending.  Attempts to ameliorate this via higher taxes will ultimately make the economy less productive.
• There is now a concerted push from economic commentators to focus on the headline budget deficit as the Federal Government stuffs an ever increasing number of projects into the “off budget” bucket. Costs for most of these are running at multiples of their original estimates.
• While plans to address the runaway costs of the NDIS and make the discount on capital gains tax less generous should be welcomed as moves in the right direction, they are woefully inadequate to address our current system of taxation and transfer payments which is fundamentally broken. How much faith can we put into the repeated claims that this will be a “responsible budget” with only “responsible” spending increases. Again, the recent track record does not inspire confidence.
• The RBA is now in a world of hurt as inflation continues to rise and growth remains sluggish. The most recent jump of 1.1% to an annual headline rate to 4.6% is alarming, although not unexpected. While underlying inflation remained at a more modest 3.3%, the argument that (much like the budget deficit) headline inflation should become the focus are compelling. Not only is the headline number actually what people face every day, but the gap between the two measures will continue to grow as there are much worse hits to come. Two examples: the Master Builders association warns that PVC piping will experience price increases of up to 40% and the price of Brent oil futures touched a post war high of just under US $120 a barrel in the last few days.
• Treasury’s forecast that inflation will rise to a little over 5% this cycle appears fanciful given what is already in the pipeline. Even more worrying is that inflation expectations are already 5.9 – 6.6% depending on which survey you look at.
• The RBA has a mountain to climb and must increase interest rates further to both fight extravagant government spending at all levels of government as well as preventing general inflation expectations from becoming anchored at these higher levels. Unfortunately slipping into mild stagflation is now the base case scenario.