US inflation warning resonates

Preparing the budget to be handed down next month just got harder for Jim Chalmers after US Federal Reserve chairman Jerome Powell said interest rate cuts in the world’s largest economy would be delayed because of persistently elevated inflation. The US economy was overheated, the International Monetary Fund warned recently, and on an unsustainable fiscal path. The federal deficit in the US, economics correspondent Patrick Commins reports, is worth 6 per cent of GDP – equivalent to a mind-boggling deficit of about $160bn in Australia.

Analysts expect Australia’s March quarter inflation figure, due next week, will slow from 4.1 per cent in February, to 3.5 to 3.8 per cent – still above the Reserve Bank of Australia’s target range but moderating enough to lift expectations of a fall in rates. Prudently, however, the RBA board has made it clear that nothing is certain. “The longer it takes to return inflation to target, the greater the erosion of the purchasing power of Australian households, and the greater the risk that inflation and wage expectations drift higher than is consistent with inflation at target,” the board warned in its most recent monetary policy statement. “History shows that, should this occur, it would require more monetary policy tightening and a costly period of higher unemployment to stabilise inflation expectations and return inflation to target.”

Last month the Treasurer indicated a shift in emphasis in budget planning. Inflation would remain a primary focus, Dr Chalmers wrote in The Australian, but not the sole focus. The budget would provide “a bigger emphasis on foundations and drivers”. Creating the conditions for investment and growth is vital. On Wednesday, Dr Chalmers said the net-zero emissions transformation under the government’s Future Made in Australia would cost hundreds of billions of dollars. “Now, obviously the commonwealth budget is not in a position to provide those kinds of sums, but what we are in a position to provide is big, significant investments, and you’ll see that in the budget,” he said.

The government also is committed to other big spending: the major defence upgrade, superannuation on paid parental leave, pay rises for aged care and childcare workers, and the National Disability Insurance Scheme.

The revised tax cuts in the budget will relieve cost-of-living pressures but encourage consumer spending. Such measures potentially will exacerbate inflation, which is why Dr Chalmers and Anthony Albanese must avoid further populist largesse. After 13 interest rate rises since May 2022, home buyers, tenants in the private market and small business borrowers would benefit most from a fall in rates. In that, the government has a key role in containing its own spending.