No relief in budget because it would add to inflation: Chalmers
Bugger all – that’s what the budget does to combat intense cost of living pressures being felt right now, but Jim Chalmers argues new immediate help would do more harm than good by adding to inflation.
NSW
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Bugger all – that’s what the budget does to combat intense cost of living pressures being felt right now, but Jim Chalmers argues new immediate help would do more harm than good by adding to inflation.
Labor’s first budget says inflation will be higher for longer with the chief culprit being electricity prices, which Treasury says will increase by another 30 per cent next financial year.
Inside the lockup in Canberra, the Mr Chalmers defended the government’s decision to do nothing to ease the squeeze on households by saying that it would only make the Reserve Bank of Australia’s job even harder.
“The message I have for Australians all around the country is that the worst thing that we could do is to contribute to even higher inflation,” the Treasurer told reporters.
The budget papers consider the consequences of even higher inflation than is currently anticipated and suggest it would cut deep into consumer spending, lowering economic growth by 0.75 per cent and lifting the unemployment rate by the same degree.
Adding to inflation could also force the RBA to go even harder on interest rates, if such a thing is possible after an unprecedented six hikes in six months.
Mr Chalmers said: “You don’t want cost of living relief to be counter-productive.
“The best thing we could do right now is exercise restraint.”
It’s a course of action likely to be welcomed by economists.
In the lead-up to the budget, Deloitte Access economics partner Stephen Smith pointed out that it is difficult for the government to ease cost of living pressures because “relief against inflation can itself be inflationary.”
However it leaves families to struggle with fast-rising bills.
A GLIMMER OF HOPE FOR NEW PARENTS
Labor’s plan to increase childcare subsidies will help more than a million households, including new parents Maye Rodriguez and husband Fernando Ivarra — from next financial year.
But “the main problem now for everyone I think is inflation which has made the cost of living very high,” Mr Ivarra said. “I cannot afford to pay for everything.”
While the Ivarras childcare costs will be lower than they would have otherwise been, their electricity expenses will be higher.
Mr Chalmers said the government was particularly worried about the outlook for power prices and flagged consideration of a “broader suite of regulatory interventions”.
He didn’t say what these might include. And he was coy when asked if the Albanese government was still committed to lowering power bills by $275 a year by 2025.
Treasury forecasts inflation of 5.75 per cent this financial year, 3.5 per cent in 2023-24 and 2.5 per cent for the two years after that.
Like the RBA, Treasury believes inflation – as measured by the consumer price index – will peak at 7.75 per cent this Christmas.
The CPI for the year to the end of September will be released by the Australian Bureau of Statistics on Wednesday. AMP chief economist Shane Oliver has tipped a reading of 7.1 per cent, up from 6.1 per cent in the year through June; ANZ Bank’s boffins expect 7 per cent.
POWER PRICES FUELLING THE FIRE
The budget papers say “high inflation is now expected to persist for longer … largely due to the pass-through of higher energy prices to household bills.”
Treasury goes on to say that “given forward wholesale contract prices for electricity remain elevated, retail electricity prices are expected to rise by a further 30 per cent in 2023–24.”
Power company bosses have predicted increases of as much as 35 per cent next year.
Electricity and gas costs are tipped to add 0.75 of a percentage point to inflation this financial year and one percentage point in 2023-24.
Inflation will fall as “global supply-side pressures moderate” and higher interest rates reduce demand, the budget papers say.
Wages are forecast to grow at 3.75 per cent this financial year – that’s two percentage points slower than living costs.
Wage growth is also expected to be 3.75 per cent next year, which is marginally higher than the forecast inflation rate then. If that plays out, on average, Australian workers would experience a small real increase in their earnings.
The wage forecast is largely in line with what the RBA and private-sector economists anticipate.
But there is a big divergence when it comes to household spending.
In the budget, Treasury predicts consumption growth to speed up from 4.1 per cent last financial year to 6.5 per cent this financial year.
In sharp contrast, the RBA’s current forecast for 2022-23 is just 2.8 per cent. That prediction was made in August.
Treasury anticipates the “near-term recovery” in spending will come from households eating into their savings.
“In particular, spending on overseas travel is expected to rise sharply in 2022–23, reflecting pent-up demand for international travel,” the budget papers say.
Consumption growth is tipped to dive to 1.25 per cent in a “significant downgrade” as interest rates and cost of living pain takes its toll.
“Further sharp rises in the cost of essentials, such as housing costs and energy, are expected to create pressures for families, particularly for those with lower incomes where these expenses make up a larger share of their budgets,” the papers, produced by Treasury, say.
Smoky Sues American BBQ owner Owen Brown said small businesses were experiencing a double-whammy – their own costs were going up and customers were penny-pinching.
“We’re seeing an increase of people going, ‘I’ll just get the burger today’,” Mr Brown said.
NO EXCISE RELIEF, NO WORRIES
While unleaded petrol prices spiked to $2.15 a litre in Sydney and Melbourne this week, the budget papers say fuel costs are trending lower than it had been expecting in July.
That’s welcome news not just for motorists but for the government, given it decided not to extend the fuel excise cut which was saving drivers more than 24c/l.
On interest rates, the budget references a survey of market economists which predicts the RBA still have 0.75 percentage points of hikes in store between now and some unspecified time in the first half of next year.
Investors are betting the central bank will go much harder than that.
But some of the most highly regarded RBA watchers, such as CBA’s Gareth Aird, believe there is only one quarter-point increase left. Mr Aird reckons that will occur before Christmas and that there will then be two cuts in the second half of 2023.
By exhibiting restraint, Mr Chalmers has avoided adding to the negative pressure on the Australian dollar.
In September, the then Truss UK government spooked markets by announcing $80 billion of debt-funded tax cuts. The pound shed more than five per cent of its value against the US dollar in the days after.
The budget’s economic forecasts are based on the Aussie dollar remaining at about US63c.
CBA anticipates the Aussie will strengthen to US65 cents by Christmas before weakening in the first half of 2023.
Others say the exchange rate could slip into the US50s.
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