Posted: 2024-05-12 18:47:13

Tomorrow's budget will predict inflation under 3 per cent by Christmas, but also a slower-than-expected economy, as the federal government battles competing tasks of spurring growth and reining in rising costs.

The inflation figure is more optimistic than that predicted by the Reserve Bank of Australia, which Finance Minister Katy Gallagher says is because yet-to-be-announced budget measures will take pressure off inflation.

"I think the Treasury forecast has been made mindful of all of the decisions that we've taken in our budget, it is going to be a responsible budget," Ms Gallagher said. 

"It's going to put downward pressure on inflation. It's part of the solution to the inflation challenge. So, the Treasury forecast outlines that. Obviously, those decisions weren't available to the RBA in their forecasts." 

Senator Gallagher did not outline which new budget measures would reduce inflation. But the government has claimed its previous cost of living measures – energy bill relief, child care subsidies, and a boost to rent assistance – wiped 0.5 percentage points off inflation, a claim some economists contest.

But while its short-term inflation outlook is improved, the budget has downgraded its expectations for real GDP growth for both of the next two financial years.

It is understood the budget papers point to "considerable uncertainty" about the extent of economic growth in both the domestic and global economy.

Inflation slightly better, then slightly worse

Treasury will forecast an annual inflation figure of 3.5 per cent for the upcoming June quarter.

That is a better result than the 3.75 per cent it predicted in December's mid-year update. It's also a better result than the 3.8 per cent predicted by the Reserve Bank last week.

For the 2024-25 year, Treasury will forecast 2.75 per cent inflation, unchanged from its last forecast. This is again lower than the RBA's forecast of 3.1 per cent.

But Treasury appears to expect inflation to be lower in the first six months of the financial year, with Senator Gallagher suggesting inflation would be within the RBA's target range of 2 to 3 per cent by the end of the year.

Inflation is then expected to be slightly higher in 2025 and 2026.

2023/24

2024/25

2025/26

Budget 2023/24

3.25%

2.75%

2.5%

Mid-year update

3.75%

2.75%

2.5%

Budget 2024/25

3.5%

2.75%

2.75%

While the government has not published Treasury's full rationale for the change, a lower forecast was foreshadowed as early as February.

At that time, Treasury secretary Steven Kennedy told Senate estimates that Treasury's December predictions were likely too high, reflecting "the recent flow of information".

"The RBA's new term inflation forecasts are below ours now," he said in February. "They've had an opportunity to update their inflation forecasts with the recent data in mind... Ours would probably come down in light of the recent data... In broad terms we have the same inflation outlook."

Those comments might explain some of the gap. Any remaining gap between Treasury and the RBA could likely be explained by the extension of similar cost of living relief to what the government has already provided.

Angela Jackson, lead economist at Impact Economics, said the gap appeared consistent with further energy bill relief and an increase to Commonwealth Rent Assistance, both of which have been foreshadowed.

"There might be something else in there we're not aware of... But the differences are minor," she said.

Dr Jackson noted the government had not yet published Treasury's full unemployment forecasts, but revealed last week that it predicted 4.5 per cent unemployment next financial year, higher than the RBA, the flip side of its lower inflation forecast.

"It appears that Treasury is forecasting that the economy will slow at a faster rate than the RBA, but the differences are minor," she said.

Treasury is predicting slower economic growth in the next two financial years.

2024/25

2025/26

Budget 2023/24

2.25%

2.75%

Mid-year update

2.25%

2.5%

Budget 2024/25

2%

2.25%

Will this be an 'inflation fighting' budget?

Treasurer Jim Chalmers has credited spending restraint and targeted cost of living relief with helping inflation moderate since the last set of forecasts.

View More
  • 0 Comment(s)
Captcha Challenge
Reload Image
Type in the verification code above