High voltage: Jim’s $300 power play to fight inflation

Australians will be given $3.5 billion in subsidies to soften the blow from soaring energy bills in a federal budget that pours cash into household and business measures while promising to cut inflation before the next election.

Treasurer Jim Chalmers said the $300 energy bill subsidy would go to every household over the year from July 1 and a $325 subsidy would go to 1 million small businesses over the same period, on top of a mammoth outlay on “made in Australia” industry schemes.

Finance Minister Katy Gallagher and Treasurer Jim Chalmers during the budget lock-up on Tuesday.Credit: Dominic Lorrimer

But economists warned that Labor could not “subsidise its way to lower inflation” because the budget spending would flow through to demand and put pressure on the Reserve Bank to keep interest rates higher for longer.

The Labor spending decisions cost $24.4 billion in total over five years across all measures, weakening the budget bottom line when the government expects this year’s $9.3 billion surplus to be followed by deficits amounting to $112.8 billion over the subsequent four years.

Total payments are forecast to climb from 25.4 per cent of economic output this year to 26.6 per cent in two years’ time, the highest level in four decades apart from the emergency spending in two of the pandemic years.

Treasury estimates that the energy bill relief and other measures will cut the rate of inflation by 0.75 percentage points this year and 0.5 percentage points next year, prompting Chalmers to assure Australians he is helping to ease the cost of living.

“That means inflation is expected to be lower, sooner,” he said in his budget speech on Tuesday night.

Independent economist Chris Richardson said there was a case for subsidies to help people with the cost of living, but he added that this would not have a lasting impact on inflation.

While Richardson accepted the Treasury estimate that last year’s energy bill relief cut inflation by half a percentage point, he said this was “like checking the score at half-time”, because the bigger test was the overall effect on demand.

“You can’t subsidise your way to low inflation,” he said.

The inflation forecast is shaping the political debate over the budget because Reserve Bank governor Michele Bullock expects the consumer price index to be about 3.8 per cent in June and to remain at that level to the end of the year, while Treasury forecasts 3.5 per cent by June and 2.75 per cent next year.

In a crucial forecast about salary levels for millions of workers, the budget assumes real wages will increase by 0.5 per cent this year and in the subsequent two years, allowing Labor to assure voters it was improving real incomes. The lower inflation rate is central to these estimates.

The budget also includes $1.9 billion in Commonwealth Rent Assistance, $531 million for home care packages for the elderly and $3 billion for cheaper medicines, as well as confirming recent announcements such as a $3 billion cut to student debt.

As well as the direct spending, Chalmers emphasised the revised stage 3 income tax cuts, worth $1888 a year on average to each taxpayer, or $36 a week.

The policy centrepiece of the budget, called Future Made in Australia, is tipped to cost $22.7 billion over a decade and across dozens of individual policy measures, going beyond recent announcements such as subsidies for solar panel producers.

The government will put more money into funding grants and tax breaks for companies that produce hydrogen, as well as subsidising battery producers on the grounds that Australia should add value to its own minerals, such as lithium and nickel, rather than relying on other countries to use them to make batteries.

But the concept sets up a fundamental political dispute about “picking winners” with risky investments, as Opposition Leader Peter Dutton warns against big government spending programs.

While the nation’s finances have benefited from strong commodity prices, the budget shows total debt will rise to $904 billion by June 30 and surpass $1 trillion two years later.

The interest bill on total debt will be $23.8 billion this financial year, climbing to $36.8 billion at the end of four years. When other liabilities are included, the total interest expense will be $41.2 billion in 2028.

Net debt will reach $499.9 billion this year and will increase in nominal terms over the next four years, but it will fall as a proportion of the economy as a result of stronger economic growth and the value of Commonwealth assets.

Shadow treasurer Angus Taylor has prepared for the budget fight by declaring that spending growth must remain below economic growth, pointing to big increases in outlays.

The budget papers show that government payments shrank by 4.9 per cent in real terms last year, but they will increase by 4.5 per cent this year and 3.6 per cent the following year.

In an important measure of federal outlays amid the political dispute over spending, total payments are forecast to increase to 26.4 per cent of gross domestic product next financial year and 26.6 per cent in the following year.

This would take the payments to their highest level in recent decades outside the pandemic when measured as a share of the economy, even though Labor promises to reduce the growth in payments.

The last time payments surpassed 26 per cent of economic output, apart from during the pandemic, was in 1994. The payments reached 25.8 per cent during the fiscal stimulus in response to the global financial crisis of 2007-09.

In a sign of the structural deficit that will wipe away this year’s surplus, total Commonwealth receipts are tipped to rise to $719.4 billion in the 2026 financial year, or 25.1 per cent of the economy. This growth would be outpaced by the increase in spending, forecast to reach $762.2 billion in that year, or 26.6 per cent of the economy.

The result, after including $7.4 billion in earnings from the Future Fund, would be a deficit of $42.8 billion in that year.

The government made several improvements in the budget bottom line, including $1.3 billion from stricter tax compliance in the “shadow” economy that does not pay tax, and another $1.3 billion from a crackdown on tax avoidance.

It also recorded a $14.1 billion improvement over four years from a change to its forecasts on outlays on the National Disability Insurance Scheme.

Credit: Matt Golding

Even after this, however, spending on the NDIS will rise from $42.9 billion this financial year to $60.1 billion in the 2028 financial year. The program is now the second-biggest federal program, after support for seniors, at $58.9 billion this year.

The largest federal outlay, at $91.6 billion this year, is assistance to the states. The budget papers revealed that the GST deal to top up payments to Western Australia, unveiled by the Morrison government, will cost $4.9 billion this year, far greater than first claimed.

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