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.
But he also acknowledged there was difficulty ahead in getting inflation below 3 per cent.
"Our budget will be part of the solution to cost of living pressures, not part of the problem," Mr Chalmers said.
"Inflation is moderating in welcome ways, but it's not mission accomplished because people are still under pressure."
"Inflation is still the big near-term challenge in our economy which is why the government is doing its bit in the budget."
Senator Gallagher added "the composition, the timing [and] the quality" of what the government was spending contributed to the inflation forecast.
"There's a lot in this budget and we have been very mindful of the economic circumstances that we're operating in at the moment. There's challenges, but opportunities, in that as well."
Dr Jackson said the government had a difficult balance to strike.
"There's been this balancing act of bringing inflation down while supporting people through this difficult period of cost of living," she said.
"And I would add to that now they're also balancing that downside risk of a more significant slowdown. There's nothing they could do here that's without risks of either overinflation [the economy] or undercooking it. It's evenly poised."
Steven Hamilton, associate professor of economic at George Washington University, agreed that the lower inflation forecasts could be consistent with new cost of living relief in the budget, but said this would only have a superficial, short-term effect on inflation and worsen it in the long term.
"Energy subsidies have a mechanical effect on [measured] CPI inflation as they temporarily lower the level of prices ... [but] then the price level rises as the subsidy goes away, increasing CPI inflation," he said.
"Energy subsidies also have an economic effect. They put more money into people's pockets ... People take the money that they would have paid in higher energy prices and buy things with it.
"So there's no doubt whatsoever that energy subsidies leave the overall price level higher than it was before."
Dr Jackson agreed energy bill relief could reduce the headline inflation figure "without necessarily address either a demand or a supply side driver of inflation."
But she added there could be an inflation benefit to energy bill relief if it reduced energy costs for small businesses, which then lowered prices.
"In terms of targeted support, it's not a bad thing at the moment to alleviate some of the significant pressures," she said.
Coalition accuses Labor of spending too much
Shadow Treasurer Angus Taylor accused the government of having a spending problem that was fuelling inflation.
"What we have seen from Labor to date is two failed budgets," he told the ABC.
"They haven't delivered this cut in homegrown inflation that we have seen under Labor, and the result is if we have another flop in this budget, Australians are going to pay a very, very high price."
Earlier this year, Labor announced an overhaul of the stage 3 tax cuts, which will see all taxpayers get a tax cut from July.
Mr Chalmers told the ABC the income tax cuts were the centrepiece of the cost of living relief and that he stood by the decision to give the highest income earners a tax break, too.
"The way that we've redesigned the tax cuts are bang on for the circumstances we confront," he said.
Mr Chalmers said the budget would offer greater cost of living relief beyond the tax cuts.
"We've found other ways as well to provide cost of living help to people who might not be in the tax system for example," he said.
The government has hinted last year's energy bill rebates could be extended.
Mr Taylor said Labor had been relying on high commodity prices to pay for its spending, rather than growing the economy.
"They should make sure the economy grows faster than spending, and that's the exact opposite of what we've seen in the last two years," he said.
Loading...