Inflation, growth will be long-term tests of budget

Two days after the Albanese government’s second budget, concerns centre on its potential inflationary effects, leading to more interest rate rises, and the lack of a growth strategy for the economy. The budget also has important elements worth commending. These include boosting the incentive for general practitioners to bulk-bill pensioners, children and others under Medicare, taking pressure off public hospital casualty emergency departments. Jim Chalmers saving 82 per cent of the extra windfall from stronger employment and the commodities boom – 87 per cent over two years, a total of $208bn – will help much-needed budget repair. “If we’d followed the example of our predecessors, who returned around 40 per cent of revenue upgrades to the bottom line, we’d be forecasting deficits of around $40bn, rather than a surplus of $4.2bn,’’ Dr Chalmers told the National Press Club on Wednesday.

He defended Treasury’s assumption that the $14.6bn cost-of-living package would drive down inflation by 0.75 percentage points. The relief being delivered to households was targeted, Dr Chalmers said, and would be delivered throughout the year, not in one big hit. Whenever the relief is delivered, however, it was a high-spending budget, boosting lower-income households that are likely to spend the money, increasing demand.

Goldman Sachs Australia chief economist Andrew Boak said the increase in policy-related spending across the next four years would make it harder for the Reserve Bank of Australia to return inflation to its 2-3 per cent target range in a reasonable timeframe. “Especially given surging migration-led population growth and the recent strong rebound in house prices, we see a firming case for further policy tightening by the RBA over the coming months,” he told The Australian.

Rich Insight economist Chris Richardson predicted the budget could prompt the RBA to keep raising interest rates. “I had thought that the Reserve Bank was done and dusted, but this has notably raised the chance that they will do another swing of the baseball bat,” he said. “It would be marvellous if it wasn’t inflationary but it will be harder to achieve that.” Westpac chief economist Bill Evans said new spending in the budget relative to the 10 years before Covid-19 was almost twice as strong as seen in the past, so people would argue this was a big-spending budget. The budget would not trigger a rate rise from the RBA, he predicted. But he warned there was a risk that additional spending could result in the RBA’s opportunity to cut rates as early as February starting to fade away.

At a time of sluggish productivity and a workplace relations system doing little to improve it, Treasury’s projections for economic growth were deeply concerning. They forecast that growth would slow from 3.25 per cent in 2022-23 to 1.5 per cent the year after, before recovering to 2.25 per cent in the next. Little was said, however, about encouraging private sector investment and lifting the burden of regulation. The Australian Industry Group, Master Builders Australia, the Business Council of Australia and the Minerals Council of Australia all criticised the government for avoiding structural reforms that boost productivity. Like the social welfare lobby and trade unions that prosecute their cases, those business groups, and others, need to be more outspoken and consistent in presenting their arguments to the government and to the public. They need to explain why productivity, growth and a more flexible workplace relations system matter to jobs and living standards, and how to improve performance.

In his budget speech and his press club address, Dr Chalmers emphasised that the “biggest opportunity for growth and prosperity” was the shift to clean energy. As part of his vision for “our resources, our researchers and our regions” to “help power the world”, Dr Chalmers allocated $2bn for a new Hydrogen Headstart program “so Australia can be a world leader in producing and exporting hydrogen power”, while reducing emissions in heavy industry domestically. The government has promised to “bridge the commercial gap” for early stage green hydrogen projects by providing revenue support through “competitive hydrogen production contracts”. Hydrogen power means “Wollongong, Gladstone and Whyalla can make and export everything from renewable energy to green steel”, Dr Chalmers said. “Seizing these kinds of industrial and economic opportunities will be the biggest driver and determinant of our future prosperity.” If the government has picked a winner it could be a major opportunity across time.

Long-term industry and productivity planning is important. But in terms of energy planning, other options should not be overlooked or ruled out. The Australian Petroleum Production & Exploration Association and Low Emission Technology Australia, which works with hard-to-abate industries to invest in emission-cutting technologies, were critical on Wednesday of the budget’s lack of support for carbon capture, use and storage. LETA chief executive Mark McCallum told The Australian’s business pages that Hydrogen Headstart’s exclusive focus on renewable hydrogen missed an opportunity to focus on all hydrogen production pathways, including clean hydrogen using coal, gas or biomass with carbon capture and storage.