Jim Chalmers vows fiscal restraint as energy rebates scrapped
Treasurer Jim Chalmers has scrapped $6.8 billion electricity rebates and warned of more ‘difficult decisions’ in next week’s budget update to tackle ballooning deficits.
Jim Chalmers has promised more difficult decisions on spending cuts in his mid-year budget update next week after refusing to extend billions of dollars worth of electricity rebates in an attempt to rein in government spending and ballooning deficits.
The rebates cost the government $6.8bn over three rounds, and were designed to artificially reduce headline inflation, but economists and the country’s official statistician estimate that electricity prices would rise by 26 per cent without rebates, adding to a more than 37 per cent increase already following the completion of state rebates.
While Treasury has factored this into its inflation forecasts, such a substantial lift in electricity prices will give the Coalition further ammunition for fighting the cost blowouts of Climate Change and Energy Minister Chris Bowen’s energy transition.
As foreshadowed by The Australian last month, the Albanese government decided to drop the rebates for all household power bills, which its handpicked inclusion committee had been encouraging.
“I’ve already announced the difficult decision that we’ve taken today as a cabinet. There’ll be other difficult decisions in the mid-year budget update as well,” Dr Chalmers said.
“It’s not a mini budget, but there will be savings and there will be difficult decisions, and one of them is around these energy bill rebates.
“It has always been about responsible economic management,” Dr Chalmers told reporters on Monday.
AMP chief economist Shane Oliver said the decision to drop rebates would probably add 0.4 percentage points to overall inflation. And while it would not improve the mid-year budget position, it would prevent it from getting worse.
“It would have been a silly decision to continue the rebates at about $2bn per year. It would have made the MYEFO worse if it had continued and the longer you leave it in place it just becomes impossible for a government to end it,” Dr Oliver said.
“Given the political pressure is less at this point in the cycle, this was the opportunity to bring the budget back under control.”
Dr Oliver also warned that there should be some scepticism over the government’s “difficult decisions”, noting Mr Chalmers may spend more of the windfall from higher than expected company tax revenues.
Iron ore prices are ahead of Treasury’s estimates and could boost those revenues.
“If they make difficult decisions and save the windfalls then that could be a sign that (Labor) are reining in spending, and that would be good because if you ask me what’s causing inflation it’s excessive government spending,” Dr Oliver said.
Professor Bob Breunig, who is a member of the Albanese government’s Economic Inclusion Advisory Committee, said it was “a good idea not to extend them”.
“They were inflationary and as we have clearly seen in recent news, the inflation beast is not tamed,” Professor Breunig said.
“We are in a world of pain with low productivity and high inflation … this is like the ’70s again.”
Treasury’s current inflation forecasts are already taking into consideration the energy bill rebates finishing, but its next set of inflation forecasts would be updated given higher than expected inflation data released recently, which included growth in prices in the NDIS.
Headline inflation hit a surprise 3.8 per cent in October, driven largely by a 37.1 per cent increase in electricity prices.
The Australian Bureau of Statistics noted in its last CPI report that electricity prices without rebates would be 26 per cent higher.
Dr Chalmers said “we’re not talking here about ending cost-of-living relief. We’re talking about shifting from one kind of cost-of-living relief to another,” referring in part to tax cuts.
He promised Labor would continue to bank most of the upward revisions to the budget, but admitted that more work needed to be done on budget repair.
“We’ve made progress on the budget, but we know that we need to make more progress, and people should see that in the mid-year budget update as well,” he said.
The federal government’s deficit has widened to $32.9bn this financial year in the four months to October 31, up from $10bn for the full 2025 financial year.
A report by Deloitte Access Economics, released on Monday, forecast the deficit for this financial year to be $38.9bn, a small improvement on Treasury’s $42.2bn forecast ahead of the May election.
However, it also forecast the structural position of the budget to worsen over the forward estimates, predicting a deficit of $44.6bn in 2028-29 compared to Treasury’s last forecast of $37bn.
Economist Chris Richardson has noted that a key part of the fiscal improvement will be containing the public service wage bill.
Last month, Anthony Albanese defended a 9.5 per cent jump in the federal public sector’s wage and salary bill after it hit more than $40bn for the first time.
Asked on Monday whether the Treasury had accounted for the public service wage bill increases, Dr Chalmers said he was still finalising the impact.
“The mid-year budget update will account for all of those usual changes in the usual way. We haven’t finalised all of the numbers,” Dr Chalmers said.
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