Federal budgets are always a balancing act, but can Jim Chalmers keep the economy afloat and inflation at bay?

Federal budgets are always a balancing act, but can Jim Chalmers keep the economy afloat and inflation at bay?
  • PublishedMay 14, 2024

Federal budgets have always been a juggling act, an attempt at trying to balance competing interests.

This year, however, is different. This year, the whole circus is coming to town.

Until just two months ago, it was to be a relatively simple affair as all the stars seemed to be aligned for the government.

Inflation was on the wane, central bankers here and around the globe appeared to be singing from the same song sheet. The next rate move was likely to be down.

In the United States’ case, up to six rate cuts were priced in by money markets as the year got underway. Although not as explicit as the US Federal Reserve, the Reserve Bank of Australia was sending out smoke signals about the potential for cuts here too.

On cue, Treasurer Jim Chalmers indicated that, with the inflation job done, the next step would be about growth, about applying some fuel to ensure the 13 rate hikes and spending restraint wouldn’t tip the economy into reverse.

Not any longer. In a spectacular twist of bad luck, inflation seems to be getting a belated second wind even as the economy is weakening.

Instead of a focus on growth, which would have paved the way for some handy spending projects in the lead-up to an election, there is now a call for restraint.The treasurer is being urged to improve growth, requiring an expansionary budget, while ensuring he doesn’t inflame inflation, which requires a contractionary budget.

That’s while ensuring cost of living relief, funding its landmark Future Made in Australia program, handouts to big business, tax cuts for small business and big pay increases for aged care and childcare workers, all of which could be considered expansionary.

It hasn’t been all bad luck, though. Once again, Labor is due to deliver a surplus, this time at more than $9 billion this financial year, a feat that evaded the opposition during its time in office despite all the promises.

At least he can argue that’s contractionary.

Unfortunately for the government, it’ll be the last in a while. The soothsayers at Treasury see deficits out into the future.

That’s expansionary.

Inflation forecasts in the firing line

Politicians the world over love a bit of theatre. They thump and guffaw in the chamber, poke fun at one another, get all righteous and indignant and then head down the pub for a few ales, usually with their own team but occasionally with opponents.

Federal budgets are a little like opening night. A lot of hype in the build-up, a good deal of grandstanding on the night, applause from the audience, and critics pointing out the shortcomings the minute they’re off stage.

In recent years, they’ve extended the show by several weeks.

There used to be the odd leak to a favoured media hack here and there. But now everything is delivered on a platter to everyone well in advance, which makes you question all the cloak and dagger secrecy and the need for media lock-ups.

This year, in addition to all the programs, they’ve even released all the key forecasts. It’s expected inflation will drop faster than expected, which flies in the face of the RBA’s forecasts issued just last week.

According to the yet-to-be-released budget papers, inflation will land at 3.5 per cent by the end of this financial year, down from the 3.75 per cent prediction in the mid-year budget update and well below the RBA’s forecast last week of 3.8 per cent.

In even better news, the rate of consumer price increases will drop to 2.75 per cent by the end of next financial year, way below the RBA’s 3.2 per cent forecast.

Should that happen, you could possibly expect some interest rate relief with a cut or two.

Why the discrepancy?

It all lies in the assumptions. The Treasurer argues that further cost-of-living measures – such as bill relief for power, rent and childcare – will deduct points from the Consumer Price Index (CPI) and hence inflation.

His critics argue he’s wrong, that putting that extra cash into recipients’ pockets will encourage them to spend money elsewhere and bump up prices.

Mr Chalmers does have history on his side. The Australian Bureau of Statistics has calculated that the bill relief in last year’s budget helped keep a lid on price rises, with Treasury now estimating it knocked 0.5 percentage points off the Consumer Price Index.

They’ve applied the same discount to the CPI this time around.

But who are we kidding? Mostly ourselves.

Forecasting has become a joke. If the people deciding on whether or not we should raise interest rates struggle to pick the trends in inflation from one month to the next, what chance does anyone else have trying to pick what will happen next year?

The budget will include forecasts on all manner of things going out for years. And the experts will weigh in with endless debate on them.

But no-one really has the faintest idea. That’s why the monkey with the dart board always wins the stock-tipping contest.

Stage 3 or exit stage left?

As part of the theatre, the opposition can be expected to launch into a scathing criticism of the way the nation’s finances are being handled.

The government will be accused of a big-spending agenda that will enslave future generations under a mountain of debt.

It’s a tradition. But it isn’t true and rarely does anyone ever call it out.

The biggest swing factor in whether we clock up a surplus or a deficit usually occurs on the revenue side.

In a recession, such as during the global financial crisis, tax revenue drops away sharply as firms earn less and people lose their jobs. Government spending usually rises during these periods because more people are paid welfare.

In 2010, revenue accounted for just 21.2 per cent of GDP. It’s since risen to more than 25 per cent. Spending, on the other hand, has remained fairly constant at about 25 per cent of GDP since the mid-1980s.

The only time it’s broken out of that range was during the pandemic when the Morrison government splashed huge amounts of cash on its poorly designed JobKeeper program with spending soaring to 31.4 per cent.

And that segues nicely to another point.

The biggest factor affecting our national finances into the future will be the stage 3 tax cuts which take effect on June 30. They’re expected to pump about $20 billion into the economy in the first year alone, courtesy of a lower tax take.

The government will hail the measure – first proposed by the Turnbull government – as a vital plank in its cost-of-living strategy. The Coalition will point out the projected future deficits and accuse the government of being fiscally irresponsible.

While the rejigged stage 3 tax cuts at least are fairer than what was originally proposed, it’s difficult to ignore the fact they will be inflationary.

If we were serious about keeping a lid on inflation and preventing future interest rate hikes, it might have been a better idea to delay them.

But that’s where politics overrides economics, where the circus performers cast aside reality.


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