Budget’s upbeat jobs numbers could come with a rates sting

The May budget will reveal that 105,000 more jobs than expected will be created in this financial year, as Labor spruiks its economic record on employment and wages.

Minister for Finance Katy Gallagher and Treasurer Jim Chalmers will deliver their third budget on Tuesday. Picture: NCA NewsWire / Martin Ollman

The federal budget will reveal that 105,000 more jobs than expected will be created this financial year, as Labor spruiks its ­record on ­employment and wages days after the Reserve Bank warned that rate hikes were back on the agenda and that a tight labour market was adding to inflationary pressures.

Treasury now anticipates the number of employed Australians will lift by 315,000 through 2023-24 to 14.3 million, or 50 per cent higher than the 210,000 ­increase forecast in December’s mid-year update.

The unemployment rate has defied a slowing economy to fall from 4.1 per cent in January to 3.8 per cent in March and back around 30-year lows; a resilience that is good news for jobseekers but which may be contributing to persistent price pressures.

The RBA board in a statement accompanying Tuesday’s decision to hold the cash rate at 4.35 per cent highlighted that a tighter than expected jobs market was supporting wages and putting pressure on services inflation.

“Conditions in the labour market have eased over the past year, but remain tighter than is consistent with sustained full employment and inflation at target. Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” the board said.

The number of employed Australians will climb by 150,000 ­between March and June 2025, ­according to Treasury estimates, suggesting the forecast for 1 per cent employment growth in the next financial year will be unchanged in Tuesday’s budget.

Despite now predicting more Australians will be employed by the middle of this year and the next, Treasury will stick to its forecast that unemployment will climb from 3.8 per cent to 4.5 per cent by mid-2025 as the workforce ­expands more quickly than the rise in jobs.

The RBA on Tuesday forecast the key jobless measure would only lift to 4.3 per cent in a little over a year’s time.

Challenger chief economist Jonathan Kearns said “the critical economic concept” remained the so-called non-accelerating inflation rate of unemployment – the lowest point at which the labour market doesn’t add to wages pressure and therefore inflation.

“Our best estimate remains that NAIRU is probably 4.5 per cent, maybe a little above that, and you would think that while you have unemployment below that you still have inflationary pressures,” Dr Kearns said. “Maybe if employers are reducing hours rather than heads, then maybe it is possible you can eke out inflation pressure at a lower level of unemployment, but at the moment the labour market is still far too tight.”

Dr Kearns said he did not ­expect any rate cut until next year, and said there was a one-in-four chance of a hike in 2024.

Barrenjoey chief economist Jo Masters said a tight labour market had the potential to add to inflation, particularly when price growth was most persistent in ­labour-intensive services industries where wages represent a large share of costs.

The budget will also reveal a faster rise in real household disposable incomes in 2024-25, which Ms Masters said would at the margin also drive more consumption and therefore contribute to keeping price rises – and potentially also interest rates – higher for longer.

She noted higher employment growth would provide a boost to the federal budget, which she said could be in surplus again in 2024-25 if commodity prices did not collapse as Treasury conservatively assumed. “I would say the path to (monetary policy) easing has narrowed, and the path to another hike has widened,” she said.

Dr Kearns said the government “can still provide cost-of-living … but still have a restrictive policy – they just need to cut in other parts of the budget”.