Chalmers didn’t give much away. The real gift could come later this year

Michele Bullock and her new board of monetary policy experts at the Reserve Bank can breathe a sigh of relief.

Jim Chalmers’ fourth budget could easily have been a pre-election spendathon that stoked any inflationary embers lurking atop kindling in parts of the economy.

The political imperative to buy off voters, particularly with cash handouts, is strong in any prime minister and treasurer facing their electoral reckoning. And the Reserve Bank – which meets next week – is alive to that impulse.

RBA governor Michele Bullock will be alert to inflationary risks in the budget. Credit: Alex Ellinghausen

That’s why, when Bullock turns to the budget papers to see how much cash is rushing out of the government’s coffers over the next 15 months, there will be a smile on her face.

Between the December budget update and the end of the 2024-25 financial year, government spending lifted by just $137 million. The economy actually hurt the budget by much more, at $520 million.

For the coming financial year, government spending is up $7.4 billion, but this is more than offset by an additional $12 billion in extra tax and reduced welfare payments.

This is in stark contrast to the last pre-election budget.

In 2022, then-treasurer Josh Frydenberg announced an extra $25.7 billion worth of spending, of which $15.3 billion was run out between budget night and mid-2023. He needed a book containing 180 pages to explain all the goodies.

Chalmers has announced $20.7 billion in spending, in a larger economy, of which $7.2 billion will be rolled out over the next 15 months. He needed only 80 pages to explain his new spending pledges.

Even the most modest of tax cuts don’t start until July 1 next year, recognising that a tax cut this year could add to inflation.

It’s one of the reasons why Treasury pulled forward by six months the time it expects inflation to be sustainably in the middle of the Reserve Bank’s 2-3 per cent target band.

The RBA’s new monetary policy committee meets for the first time next week. Ahead of the budget, financial markets put the chance of a rate cut for that meeting at little more than 20 per cent.

The same markets reckon the committee’s May 19-20 meeting will deliver a quarter percentage point rate cut, followed by another in September. For a household with a $600,000 mortgage, those two cuts would be worth a combined $200 a month.

There’s nothing in the broad macro numbers produced by Chalmers that would alter that expectation. That would be a relief for households who have been battered since inflation started to accelerate in late 2021.

For hard-pressed consumers, real wages are expected to remain positive. That would be three consecutive years of real wages growth, after the deep fall that most of us experienced as pandemic-era programs came to end.

Household consumption, which in real terms has fallen for most of the government’s term in office, is expected to lift, growing by 2.25 per cent in 2025-26. That’s after growth of just 0.75 per cent this financial year.

Personal income tax collections are expected to climb, in part due to the enduring strength of the jobs market. Unemployment is forecast to lift marginally to 4.25 per cent.

Overall economic growth, which came to a standstill around the middle of last year and which in per capita terms has gone backwards for 21 long months, is now tipped to lift.

A spark of spending on new homes, in part due to lower interest rates, is forecast with dwelling investment – which fell by 1.4 per cent in 2023-24 – tipped to grow by 5.5 per cent next year and then 7.5 per cent the year after.

Business investment still looks anaemic, at just 1.5 per cent over the coming two years. But overall private final demand is expected to take a greater share of the economic load.

Public demand, which is forecast to have grown by 9 per cent over the past two years compared to less than 3 per cent for the private sector, is finally expected to ease as the main driving force of the economy. That’s due to a slowdown in spending in areas such as the NDIS and as the states start to conclude their expensive infrastructure projects across the nation’s capitals.

Despite these positive signs, there’s no getting away from the deep red hue to the budget bottom line.

The budget deficit for the coming financial year is, at $42.1 billion, down by $4.8 billion from what was forecast in the mid-year update. And it’s followed by deficits of $35.7 billion, $37.2 billion and $36.9 billion.

After a surplus of $15.8 billion in 2023-24, Chalmers is forecasting a cumulative $179.5 billion in deficits.

Chalmers has constantly complained about the $1 trillion of debt left by the Morrison government. It never got quite to that level under the previous government, but it will reach it under the Albanese government.

The interest bill on that debt is on track to hit $26.3 billion in 2025-26 – more than is spent on financial support for people with a disability ($21.7 billion) or on pharmaceutical benefits ($21.7 billion).

Apart from the bottom line, the budget confirmed the continuing problems around the tax base.

This financial year, the government now expects just $7.4 billion in tobacco excise to be collected. That’s less than half what was originally forecast for the 2024-25 financial year. Since the mid-year update in December, tobacco revenues have been slashed by 15 per cent or about $1.4 billion.

Over the forward estimates, almost $14 billion has been wiped out from cigarettes.

This has forced the government to pump an extra $156.7 million over the next two years to “strengthen compliance and enforcement action”. That includes $49.4 million for the Australian Federal Police to target organised crime groups who are running amok around the country.

If not for that extra cash, Treasury reckons they would have collected even less in the way of tobacco excise.

The problem around tobacco excise is not going away (and will soon be followed by a drop in petrol and diesel taxes as our vehicle fleet changes).

While the government is aware of this problem, it’s not one fully addressed in this budget. Keeping the Reserve Bank happy is the main game.

Chalmers and Finance Minister Katy Gallagher reckon there will be happy central bankers in Sydney’s Martin Place for the rest of the year.

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