Is federal budget 2024 the end of small government?

The government is getting back into business.

In a move that has horrified the economic purists and overturned half a century of developed nation dogma, Australia has joined the United States and Europe in winding back the clock to an industrial future.

It hasn't exactly come as a surprise. Like almost every other announcement in this year's budget, the Future Made in Australia initiative was well flagged and debated via a series of pre-budget announcements.

It's also a relative toe in the water in comparison to the ocean of cash splashed about by the United States via its Inflation Reduction Act and other investment incentive measures.

In total, the federal government has allocated $22.7 billion over the next decade, the bulk of which will be directed towards tax incentives for renewable hydrogen and critical minerals processing.

But it also plans to make direct investments. Exactly how much is uncertain as, like the NBN more than a decade ago, investments can be shifted off the books.

In March the government extended support, including grants, to two critical minerals operations, Gina Rinehart's Arafura and lithium producer Liontown, and has recently talked up investments in quantum computing and solar panels.

"In certain circumstances, targeted public investment can strengthen the alignment of economic incentives with Australia's national interests and incentivise private investment at scale to develop priority industries," the budget papers reveal.

After decades of privatisation and shrinking government, the shift back to direct investment in industry, targeted though it may be at a renewable energy future, is a radical shift.

No matter how rigorous and robust the framework for allocating funds, new untested ventures carry an inordinate amount of risk, financial and reputational.

The three r's

Just two months ago, Jim Chalmers looked to have it in the bag.

Inflation was dropping quicker than expected and, with a cooling economy and a savage drop in household spending, a big-spending budget would have been welcomed in the lead up to next year's election.

Combine that with a potential rate cut — then pencilled in for the middle of this year — and the stage was set for a dramatic victory lap for vanquishing inflation, all while allowing for a relatively open chequebook.

That's all changed. Inflation has caught a second wind even as the economy sluggishly shuffles towards the financial year end and as unemployment slowly begins to rise.

Already, the biggest drivers of growth have been government demand and business investment as households labour under the weight of 13 rate hikes and years of real wage declines.

Navigating out of this is tricky. Stomping on spending to keep inflation in check could tip the economy over into recession. Doling out support could ratchet up inflation at the worst possible time, thereby eliminating any chance of an interest rate cut later this year or potentially before the federal election, likely in the first half of next.

The end result is a budget that looks busy and covers a lot without very much behind it.

"Relief, restraint and reform," is how the Treasurer puts it. Cost of living relief, spending restraint and economic reform with a focus on a net-zero future.

When it comes to relief, one of the few initiatives not splashed across the papers during the past fortnight is that the long-anticipated energy bill relief has been directed to all households rather than just those most in need.

That comes with a hefty price tag of $3.5 billion. Combine that with $1.9 billion for rent assistance to 1 million households, further raising concerns over federal spending adding to inflation.

Already, economists have been lining up to throw bricks at Canberra, arguing that pumping that kind of cash into the economy could only result in one outcome; adding fuel to the inflationary fire.

But the treasurer was adamant at the press conference in the budget lock-up.

Treasury, he said, had crunched the numbers and estimated the measure would directly knock half a percentage point off the Consumer Price Index without adding to broader inflation.

The trick may be in the delivery. You won't receive an extra $300 in your bank account, which may spur a splurge. Instead, your next four quarterly power bills will have a $75 discount.

Where to from here?

Dangers lurk at almost every turn.

Despite boasting two consecutive surpluses, for the first time in almost 20 years, this latest budget forecasts a return to deficits for the foreseeable future.

How'd that happen? Because it coincides with forecasts of a dramatic turnaround in household finances as real wages growth, tax cuts and, possibly, a rate cut help restore consumer balance sheets.

The answer is that our national finances are plagued by what's known as a structural deficit. The shortfall. It seems, is built in and the past two years have merely been an aberration.

A couple of things tip the balance. On the income, or revenue side, the stage 3 tax cuts denude the coffers of about $20 billion a year.

Meanwhile, on the other side, the outlay or cost side, the blowout in expenses to run the National Disability Insurance Scheme and increases in the cost of aged care conspire to ensure we continue to rack up debt.

It's not quite the disaster we were once warned about. But it can't go on unchecked.

While you're likely to hear alarming stories next year that the country now has $1 trillion in gross debt, it represents just 35 per cent of GDP. Net debt is a mere 21.5 per cent.

That's a fraction of many other developed nations. Japan, for instance, has debt levels around 10 times that figure.

But when your primary export revenue revolves around shipping dirt to China, it doesn't take much for that structural deficit to shift from being a niggling annoyance to a huge issue.

Maybe the time has come to encourage a little diversification.