2024 budget: Jim Chalmers’ hip-pocket pledge tests RBA’s nerve

Jim Chalmers will promise more money in workers’ pockets without adding upward pressure on inflation, amid warnings that government spending is ‘working against’ the RBA.

Treasurer Jim Chalmers and Finance Minister Katy Gallagher at Parliament House on Wednesday. Picture: Martin Ollman

Jim Chalmers will promise more money in workers’ pockets without adding upward pressure on ­inflation, amid warnings from leading economists that fiscal policies of state and federal governments are working against the Reserve Bank’s push to drive down prices growth.

Treasury budget forecasts project real disposable incomes will increase by 3.5 per cent in 2024-25, fuelled by moderating inflation and Labor’s stage three tax cuts, which are expected to return about half of the bracket creep that hammered take-home pay last year.

Under pressure to rein in spending and avoid stoking inflation ahead of his third budget, Dr Chalmers said: “This government and this budget are all about ensuring Australians earn more and keep more of what they earn.”

Economists and RBA analysts will closely monitor whether Treasury opts for heroic or conservative assumptions in next Tuesday’s budget following the central bank’s updated forecast that inflation would rise to 3.8 per cent in June.

Treasury’s real disposable income projections are based on a 4.5 percentage point increase in gross workforce wages, a 1 percentage point boost from stage three tax cuts and expectations ­inflation will be a “smaller drag on real incomes compared to recent years”.

After RBA governor Michele Bullock on Tuesday warned soaring petrol prices would stall recent progress on inflation, new Australian Automobile Association analysis reveals household transport costs have increased by 10 per cent in 12 months.

Jarden chief economist Carlos Cacho, who was surprised the RBA did not have firmer language on the likelihood of more rate hikes, said stage three tax cuts, a new $2.5bn energy subsidy package for Queenslanders and broader fiscal policy were “working against the RBA”.

With the RBA and markets predicting inflation and rates will remain higher for longer, ­Anthony Albanese defended the government’s economic plan at a Perth business breakfast on Wednesday.

“On the inflation front, I’ll make this point: we inherited a trillion dollars of debt from the former government (and) inflation peaked in the March 2022 quarter at 2.1 per cent in just one quarter,” Mr Albanese said.

“The inflation rate now is 3.6. It was anticipated in (the mid-year budget update) at the end of last year that it would be 3.75 at the end of this financial year. So we’re ahead of where we were going to be.

“And part of what we have done is two-fold, one, make sure that any cost of living support that we’ve given is targeted and is not putting pressure on inflation. So it would have been really easy for us to sit back and not change the tax cuts. It was a gutsy call.”

Ahead of stage three tax cuts commencing on July 1, EY chief economist Cherelle Murphy said they would return only about half of the bracket creep that smashed workers’ take-home pay last year.

At an estimated cost $23bn in 2024-25, analysts estimate the tax cuts are worth the equivalent of three interest rate cuts, and Ms Murphy said a slower than hoped decline in price pressures meant the “atmospherics” around the budget were tougher for the government.

“Altogether, it is suggesting there is not room to increase the size of the fiscal envelope (total spending), and that the budget needs to be kept tight. The (government’s) first task is … to keep expenditure limited, and where it does spend, try to offset that elsewhere. Beyond that, the focus has to be on the reform agenda for the longer term,” Ms Murphy said.

Amid calls for a bolder reform agenda and stronger action on bracket creep, Dr Chalmers on Wednesday ruled out changes to negative gearing in next week’s budget but confirmed there would be modest reforms in addition to the revamped stage three tax cuts. “What you’ll see is an emphasis on tax reform that will incentivise the kind of investment that we want to see in the future of our economy and in a Future Made in Australia. We have indicated that we are prepared to use the tax system in the service of our big national economic objectives,” Dr Chalmers said.

Business leaders said the Treasurer would avoid major structural reforms and was referring to a suite of tax incentives focused on Labor’s clean energy and Future Made in Australia policy priorities.

There is limited appetite in government ranks to overreach on tax reform and expose Labor to attacks over economic management one year before the 2025 election. There is also rising political fear of RBA intervention and more rate hikes in addition to the 12 since the 2022 election.

With federal and state governments on notice over cash splashes and indiscriminate spending driving up consumer price index indicators, the RBA’s Statement of Monetary Policy on Tuesday warned inflation could be more persistent than expected if productivity growth did not pick up.

Dr Chalmers – whose revamped stage three will hand 11.5 million taxpayers receive larger tax cuts with an average tax cut of $1888 in 2024–25 – said: “Decent wages and bigger tax cuts for more people are a big part of helping people earn what they need and deserve to provide for their loved ones. We know people are under pressure and that’s why our wages policies and tax cuts for every taxpayer are so important. This is all part of a big focus in the budget on helping to ease cost-of-living pressures.”

The budget papers project real disposable income to grow 3.5 per cent in 2024-25, which would be the fastest growth rate in more than a decade excluding the pandemic. The mid-year budget update in December projected real disposable income growth of about 3 per cent.

Treasury says “continued moderation of inflation, in part due to the government’s targeted cost-of-living policies will strengthen the purchasing power of households”.

“Employment is expected to continue to grow next year, even as the labour market softens in response to weaker growth,” the Treasury analysis. “Nominal wages are now growing at their fastest rate in 15 years. This is due to strength in the labour market and the government’s support for the Fair Work Commission’s wage determinations.”

Mr Cacho agreed with the RBA’s analysis that households would enjoy a lift in real pay over the second half of this year, not least because of tax relief, but also as government subsidies freed up household budgets to spend on other things. “Given there are a lot of households that are cash-strapped, a lot of those benefits will probably go straight through into spending,” he said. “At the higher end many people will save, but for lower-and-middle income households, these tax cuts will go to spending.”

Mr Cacho said while the tax cuts had been long flagged and embedded in economists’ forecasts, “it means inflation remains elevated for a bit longer and doesn’t make the RBA’s job any easier”.

“The potential extra spending households can unleash in the second half of this year will make the problem of getting inflation back under control a bit harder.”