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This was published 3 months ago
The budget handout that could cruel your next pay rise
By Shane Wright
There’s an old business adage that you have to spend a bit of money to make money.
Jim Chalmers is taking that to a new level, spending taxpayers’ money to bring down inflation while taking a calculated punt this will force unions to wind back their expectations of ever-increasing pay packets and also not tick off the Reserve Bank.
The most eye-catching economic forecasts in Chalmers’ third budget are around inflation, economic growth and the jobs market.
Inflation is tipped to sit at 2.75 per cent in 2024-25 and 2025-26. While the Reserve Bank’s approach to taming inflation is by whacking home buyers with higher interest rates, Chalmers has sought to directly affect the consumer price index.
The $300 payment to households (and $325 to small businesses) to offset their higher energy bills, plus the 10 per cent increase in Commonwealth Rent Assistance, are alone expected to reduce the CPI by 0.5 percentage points.
Factor in something else like the previously announced changes to childcare or the plan to freeze co-payments at their current level for concession-card users of the Pharmaceutical Benefits Scheme, and you can see how the government and Treasury get inflation down to 2.75 per cent.
Treasurer Jim ChalmersCredit: Kathleen Adele
It’s a costly way to bring down inflation that avoids having to make tough decisions on where to cut expenditure. The energy bill payments will cost $3.5 billion while the increase in Commonwealth Rent Assistance has a $1.9 billion price tag.
But just spending money on handouts to bring down inflation is not Treasury’s main game.
By bringing down inflation through particular measures, the government is explicitly affecting the ability of the union movement to press for larger pay rises. This budget is not just about the Labor Party or the voters of Australia – it’s a great big red light to Sally McManus and the ACTU.
The budget notes that the government has recommended that the minimum wage, and implicitly award wages, “not go backwards”.
The Reserve Bank remains worried about wage-led inflation. It’s also worried that Australians’ inflation expectations will drift from its 2-3 per cent target band.
If inflation is pushed down to 2.75 per cent for the next two years via direct government intervention, it makes it difficult for unions to press for something north of 3 per cent.
This is reflected in the forecasts around wages growth. The wage price index is expected to reach a decade-high of 4 per cent this current financial year before easing to 3.25 per cent in 2024-25 and 2025-26.
That slowdown in wages growth reflects the elephant in the budget room: the state of the economy.
Growth, at 1.75 per cent this year, is only forecast to lift to 2 per cent next year and 2.25 per cent the year after.
Household consumption is tipped to lift by a modest 2 per cent, even after the stage 3 tax cuts and the handouts for energy flow into the collective wallets of Australians.
Public demand, best illustrated by all those major infrastructure projects that have been clogging up our suburban roadsfor years, is expected to slow down from the frenetic pace of the COVID period.
The jobs market, the standout success of this government, is also tipped to slow. After a 3.5 per cent expansion in total employment in 2022-23 and 2.25 per cent in the current year, it is expected to slip to just 0.75 per cent in 2024-25.
Unemployment, at 3.8 per cent, is expected to push up to 4.5 per cent next year.
Some economists have criticised Treasury for being “optimistic” about inflation compared to the Reserve Bank, but the boffins in Canberra are more pessimistic than the Reserve about the state of the jobs market.
All of this while the government ramps up spending by 3.6 per cent to the best part of $727 billion. That’s after a 4.5 per cent jump in 2023-24. As a share of the economy, government spending is expected to reach 26.4 per cent (and 26.6 per cent the year after that).
That’s a greater share of the economy than during the global financial crisis. Outside the pandemic, you have to go back to the early 1980s (before Paul Keating started weaning the states off Canberra’s coffers) for such a high proportion.
Policy decisions alone will add $11.7 billion to the budget bottom line in 2024-25.
Most of the spending decisions can be justified. The $6.5 billion increase in assistance to our military veterans is due to the previous government failing to employ enough departmental staff on hand to process their applications for financial support.
The country has forced 41,000 veterans, an increasing number of whom are young men and women suffering from mental health issues related directly to their service, to wait for help.
So to pay these people (and others) requires $1.8 billion in extra cash over the next three years to make Veterans’ Affairs and Services Australia work like they should.
But cumulatively, this is a big spending budget. And 2025-26 is an even bigger spending budget.
Rather than cuts that may be politically painful to make space for this extra expenditure, Chalmers has decided to run a budget deficit after two successive surpluses.
That comes at a cost that can be measured in a bigger interest bill (now on track to reach $34.1 billion by 2027-28) and the threat of higher inflation, which runs the risk of action from the Reserve Bank.
If the RBA were to lift interest rates to deal with inflation, there is a real risk of a recession. Both the Reserve Bank and the government would have to wear responsibility for that outcome.
And the “going out of business” sign would have to be put up outside the prime ministerial office of Anthony Albanese.
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