Big budget outlays risk extending interest rate pain

Jim Chalmers will put the government’s economic credibility on the line in Tuesday’s budget, banking on Treasury forecasts that inflation will return to the 2-3 per cent target range as early as the end of this year. That would be a full 12 months earlier than the Reserve Bank of Australia’s forecast, as Geoff Chambers reports. Time will tell. Neither Treasury nor the RBA have infallible crystal balls. Last week, the RBA board warned that the path to returning inflation to the target range of 2-3 per cent in the second half of next year, and to the midpoint in 2026, was unlikely to be smooth, amid excess demand in the economy and strong domestic cost pressures. It would not rule out further rate hikes. The longer it takes for inflation to reach the RBA target, the longer household and business borrowers will wait for interest rate relief.

In adopting Treasury’s optimistic outlook on inflation, which remains the main threat to prosperity, the Treasurer is setting the government’s benchmark for good economic policy high. Regardless of the outcome, the Albanese government will be held accountable for it at the end of the year. Dr Chalmers will be relying on consumers – especially those feeling the adverse effects of 13 interest rises since May 2022 – to do the heavy lifting in reducing inflation by spending less. The government, however appears set to spend more, in key areas it hopes will win voter support.

The success or failure of that strategy will depend on how much the budget’s revised stage three tax cuts, cost-of-living relief measures and gamut of social and other spending stimulate consumer demand. On budget eve, there are few signs of restraint. On Friday, Anthony Albanese promised an extra $11.3bn to address the housing shortage, mainly on social housing and overcoming homelessness. Action by state and local governments will also be important.

Dr Chalmers on Sunday promised “substantial’’ cost-of-living relief, in addition to the tax cuts for every taxpayer. He also promised a “multibillion-dollar provision in the budget for better wages in the care economy” alongside $1.1bn over the next four years to add superannuation to paid parental leave. Beyond that immediate investment in PPL, Sarah Ison reports, the measure would cost more than $620m a year to fund permanently. That impost is significantly higher than previous expectations, which suggested the measure would cost between $250m and $430m a year. The spending on PPL superannuation will come on top of major spending on topping up wages in the aged-care and childcare sectors, in addition to subsidising building apprentices’ wages.

As EY chief economist Cherelle Murphy noted, “the government’s pre-announced policy decisions have been heavily weighted to spending rather than saving, thwarting the task of tightening the structural budget deficit”. Considerable heavy lifting will be needed to balance the new spending with budget savings, she said. That said, Dr Chalmers and Finance Minister Katy Gallagher have scope for spending cuts. Economist Chris Richardson pointed out recently that spending now runs at 26.1 per cent of GDP compared with the 40-year-pre-Covid average of 24.9 per cent.

Regaining control of runaway spending on the National Disability Insurance Scheme, as we said on Saturday, must be a budget priority. By 2032, the National Disability Insurance Agency forecasts that the $40bn-a-year program will have more than a million participants and cost almost $100bn a year. Labor is embarking on its pledge to halve the growth of the scheme – a first step towards what is needed. Just as important as spending reform, however, will be the budget’s strategies for productivity and growth.