Pre-election budget splurge could reach $30bn

A pre-election splurge including a temporary cut to fuel excise, extending the low and middle-income tax offset and cash payments to help households could lead to $30bn in new measures in the budget.

Supermarket suppliers expect to put up their prices by more than 6 per cent over the coming 12 months.

A pre-election splurge including a temporary cut to fuel excise, extending the low and middle-income tax offset and cash payments to help households meet climbing cost-of-living pressures could lead to $30bn in new spending measures in next Tuesday’s budget, analysis by investment bank UBS says.

Josh Frydenberg in a speech last week said the government’s fiscal strategy had shifted from emergency support and securing the post-lockdown recovery to its second phase of growing the economy in order to stabilise and then reduce the record debt pile accumulated throughout the pandemic.

“Fiscal settings need to be normalised,” the Treasurer said.

However, an epic commodity price boom has swelled the commonwealth’s coffers and offered the opportunity to frame a ­budget that would help households struggling with higher ­living costs and firm up the government’s prospects at the May election.

UBS chief economist George Tharenou said adding potential policy measures canvassed in the media – including flood relief – alongside increases in spending on items such as the NDIS, aged care and defence, would represent a “material” increase in spending equivalent to 1.5 per cent of GDP over this and the next financial years.

Mr Tharenou said such an outcome – while not a certainty – would add to inflation and put more pressure on the Reserve Bank of Australia to respond.

“That’s the sort of number which would be pushing above expectations and increase the possibility of a rate hike,” he said, nominating June as the most likely meeting for a lift from 0.1 per cent to 0.25 per cent, followed by two more hikes over the balance of the year.

Mr Tharenou agreed the “cost-of-living pressures are real”. “Cost-of-living pressures are very acute, particularly for lower income households ­unable to substitute away from essential items like fuel and food, which are having the largest price increases,” he said.

Supermarket suppliers told a recent UBS survey they expected prices to climb by more than 6 per cent in the coming year – about three times the level immediately before the pandemic.

Following the east coast floods and amid high petrol ­prices, suppliers expect costs will rise by almost 8 per cent.

Mr Tharenou said overall consumer price growth would accelerate to 5 per cent over coming months, and higher borrowing costs would intensify pressure on household budgets.

Australians have saved an extra $200bn through the pandemic, which meant “the consumer and broader outlook is increasingly reliant on households’ willingness to continue to run down savings”, he said.