Budget 2022: rate rises, inflation trigger growth downgrade

Interest rate hikes, inflation and the global downturn will inflict significantly more damage on the economy than predicted, ­according to grim budget forecasts.

Treasurer Jim Chalmers says global economic headwinds will ‘inevitably impact our growth outlook’. Picture: AAP

Australia’s economy is poised for a major shock next year with interest rate hikes, persistent inflation and the looming global downturn inflicting significantly more damage than predicted, with growth downgraded to just 1.5 per cent, ­according to grim forecasts in Tuesday’s budget.

Jim Chalmers also warned on Sunday of more hip-pocket pain for workers, with real wages expected to remain below inflation for another year, but the Treasurer said he remained confident Australia would avoid a recession.

Budget forecasts reveal a full one percentage point will be wiped from economic growth in 2023-24 – the equivalent of $25bn taken out of the economy – due to higher interest rates imposed by the ­Reserve Bank of Australia, the slowdown in China and war in Ukraine.

The new modelling projects a bleaker economic outlook and exposes a split between Treasury and the RBA over the impact of higher interest rates and the effect of ­global factors on the domestic economy.

“Australians know that while our economy is growing, so are the challenges,” Dr Chalmers said. “While we have plenty of things going for us, Australians have not been immune from rampant global inflation, heightened uncertainty and cost-of-living pressures here at home.”

Ahead of his first budget, Dr Chalmers said global economic headwinds would “inevitably impact our growth outlook, and Australians are already feeling the pinch from higher prices and rising interest rates”.

“The best defence against these economic headwinds is a responsible budget, with strong investments in our people and the productive capacity of our economy, along with responsible cost-of-living relief that won’t make the job of the Reserve Bank more difficult,” he said. “This budget will be solid, sensible and suited to the times we are in.”

The revised economic growth forecasts are consistent with the higher adjusted unemployment rate of 4.5 per cent expected in 2023-24. In an indication that the full ­impacts of the current inflationary environment have yet to be felt, the budget papers will show real GDP growth in Australia has been downgraded from 3.5 per cent since pre-election forecasts to 3.25 per cent in 2022-23.

Weaker household consumption in the second half of next year, due to rising interest rates and cost-of-living pressures, are expected to weigh more heavily on family budgets and push economic growth to 1.5 per cent in 2023-24.  The Treasurer conceded inflation, which will hit 7.75 per cent in the final three months of the year and remain at high levels well into 2023, would likely delay increases to real wages until 2024.

“On the current Treasury forecasts, inflation will persist for longer than we’d like, and wages growth, which is beginning to happen in our economy, will cross over with inflation some time we think the year after next,” he said.

“We’ve been upfront with people. We do have falling real wages. That’s a big influence on what we’re trying to do in the budget. It has two parts: first of all, how do we get wages moving again in this country, and the budget will be about that.

“But also how do we help inflation moderate over time? You do that by making sure your cost-of-living relief is responsible and that your investments in the economy don’t push up inflation.”

In addition to a $100bn revenue windfall over the next four years, driven by higher tax receipts and commodity prices, Finance Minister Katy Gallagher will reveal on Monday the government’s “waste and rorts” audit has slashed and redirected more than $21bn of budget spending.

Dr Chalmers, who confirmed indexation payments to pensioners and welfare recipients would cost an extra $33bn over the forward estimates, warned of significant structural funding pressures including servicing the record debt bill and funding the National Disability Insurance Scheme, defence, health and aged-care budgets.

With the unemployment rate expected to rise from historically low levels of 3.5 per cent to 4.5 per cent in 2023-24 and 2024-25, opposition treasury spokesman Angus Taylor accused Labor of “putting up the white flag” on managing cost-of-living pressures. “They’re saying they’re going to shed 150,000 jobs, they seem to be giving up on real wage increases in this election cycle, and that’s incredibly disappointing,” Mr Taylor said.

With the US and European ­nations drifting towards recession, PwC chief economist Amy Auster said Australia’s “biggest risk” was imported inflation and a tight labour market.

“When you break down the components of inflation, what we can see is that a lot of our inflation basically is imported. So it’s coming through because of supply chain disruptions out of China, it’s coming through energy prices ­because of the war in Europe,” Ms Auster said. “At the moment, the only main source of domestic inflation is coming from weather disruption related to food. We haven’t really seen wages contributing to inflation.”

Ms Auster said looking across all employment measures, including hours worked and participation rates, “you understand that the labour market is very tight and if it remains this tight it really risks compounding our inflation problem”.

“You can tackle that a couple of ways; you can slow the rate of jobs growth, which is not ideal because you’re effectively slowing the economy,” she said. “Or you can try to augment your labour force by increasing migration.”

Anthony Albanese said the “family-friendly” budget would not drive up inflation.

“We would like to do much more, but we will be responsible. We’ll make sure that we have our eye on the economic constraints … because we do need to address cost of living and there will be a range of measures,” the Prime Minister said. “But they’re all aimed at cost-of-living measures which don’t put more pressure on inflation. So cheaper childcare, cheaper healthcare costs, paid parental leave, the National Broadband Network and other infrastructure investment. All aimed at areas that will boost productivity.”