“Sometimes that means giving extra help for people who are doing it toughest, but typically we are trying to be a good, decent, middle-of-the-road government which recognises the legitimate aspirations that people have in middle Australia,” Chalmers said in national press club speech in Canberra this week.
It’s straight out of the playbook of Prime Minister Anthony Albanese’s quest to be a long-term, centre-left government that appeals to middle Australia.
Treasurer Jim Chalmers and Prime Minister Anthony Albanese in Canberra after the budget.
The strategy partly explains why Albanese, and to some extent, Chalmers, are now leaning more towards retaining the contentious stage three income tax cuts they inherited from the Coalition.
To be sure, Labor did not cause the current bout of inflation. The previous Coalition government’s $300 billion pandemic stimulus – backed by Labor in Opposition – and near-zero interest rates did more to fuel price pressures. If inflation was made in Canberra, it was made during the pandemic.
But after a year in power and handing down two budgets, it will become harder for Labor to blame the former government and RBA governor Philip Lowe for inflation and any future interest rate rises. Among voters, the buck may stop with the prime minister and treasurer.
The risk for Labor is that the government could “wear” the pain among over-leveraged home borrowers. A person with a $1 million variable rate home loan faces monthly mortgage repayment increases of more than $2000 since May last year.
In the short term, Australians receiving financial support in the budget, such as expanded Medicare, cheaper medicines and higher childcare rebates – will feel some relief.
Chalmers has used the five-year, $152 billion revenue windfall to the budget from more people working and soaring export prices for iron ore, coal and gas, to sprinkle $14.6 billion of cost of living relief around over the next few years.
In economic analysis terms, the heated debate over whether or not the cost-of-living package is inflationary is nuanced and requires a deeper explanation.
Chalmers says only about $3.6 billion of cost of living support or about 0.1 per cent of GDP will flow in the upcoming 2023-24 financial year when inflation pressures are still high.
Some of the measures, such as power bill rebates, childcare subsidies and cheaper medicines will mechanically reduce the price of items directly measured in the consumer price index (CPI).
Jo Masters, chief economist at Barrenjoey. Peter Rae
Economists such as Outlook Economics’ Peter Downes and Barrenjoey’s Jo Masters say this will help reduce inflation expectations and lower inflation-linked pay rises for workers, including by the Fair Work Commission.
“On balance, it’s a bit deflationary,” Downes says of the budget, according to his modelling.
But other economists such as Chris Richardson and Steven Hamilton disagree, despite Chalmers saving about 70-80 per cent of the $100-billion-plus revenue upgrades and on path to deliver a $4 billion surplus in 2022-23.
Overall, the government’s net policy decisions beyond cost-of-living support next financial year alone add about $12 billion or 0.5 per cent of GDP to the economy when inflation pressures will be easing but still high.
(Over four years, it’s a net injection of a forecast $21 billion, or $34 billion if you include the $13.4 billion aged care pay rise, and $44 billion if you count the net impact of all of Labor’s policy decisions since the October budget.)
Some of this is unavoidable funding for business-as-usual programs that were expiring and not fully funded into the future by the Coalition. Overall, the government’s budget will add a bit more money into the economy at a time when its capacity is already stretched.
Furthermore, the cost-of-living rebates and subsidies may reduce the measured CPI in the short-term, but will leave more money in people’s pockets to spend on other items and may generate inflation elsewhere beyond the short-term.
Perhaps, this is why Treasury’s language is carefully constructed to argue that the energy bill rebate will directly lower the CPI by 0.75 per cent and the budget will not add to broader inflation pressures in the economy. It’s code for Treasury tipping the inflation impact will be broadly neutral.
Senator Jane Hume has some questions around inflation. Luis Enrique Ascui
But shadow finance minister Jane Hume points out that the official “fiscal strategy” in the May budget watered down a reference to targeting inflation from October which said, “the immediate priority is to ensure fiscal policy is not adding to inflationary pressures and to begin budget repair.”
The section of the updated fiscal strategy now reads: “The government will improve the budget position in a measured way, consistent with the overarching goal of reducing gross debt as a share of the economy over time.
“This approach enables fiscal policy to respond to changes in economic conditions to support macroeconomic stability, including in times of high inflation.”
Partisanship aside, perhaps the fairer question is not whether Labor is worsening inflation, but if it could be doing more to help the RBA reduce it.
Westpac chief economist Bill Evans says the bank’s analysis points to the budget being more “expansionary”, or stimulatory, than any of budgets the ten years before the pandemic. He points to the net spending of $12 billion or 0.5 per cent of GDP in 2023-24.
“The budget is still unlikely to be a core factor for the rate decision in August, but may delay the timing of the first rate cut in 2024,” Evans said in an updated research note on Friday.
But after two budgets finding savings of about $38 billion to reallocate elsewhere, Labor’s ability cut spending to fund priorities will be “a lot harder”, according to Finance Minister Katy Gallagher.
“You’ve probably done most of the stuff as much as it can be that is non-controversial,” says Gallagher, noting that reining in the National Disability Insurance Scheme by as much as $59 billion over a decade will be a real challenge.
But after opening up the gates in this budget, Labor will remain under pressure from progressives to provide more for social welfare, especially if cost-of-living pressures are still biting.
Moreover, Liberal and Labor strategists agree that before the next election that is due by the first half of 2025, middle Australia will be agitated and expecting some financial relief.
That could come via potential interest rate cuts in 2024, easing inflation and/or the stage three income tax cuts.
An ABC online story this month portraying the tax cuts as massively expensive and unfair spread like wildfire among Labor backbenchers.
But senior members of the government are now, perhaps begrudgingly, coming to the view it will be hard to take tax cuts away from people earning, say, $120,000, and experiencing mortgage stress in the suburbs.
While the lion’s share of the tax cuts from July 2024 will go to people earning over $180,000, Albanese and Chalmers now point out they will flow to everyone earning more than $45,000.
The stage one, two and three tax cuts will struggle to replace bracket creep for most households, with only the top 20 per cent getting a notable tax cut in real terms, according to modelling by Australian National University economist Ben Phillips.
The one dilemma will be if inflation fails to return to inside the 2-3 per cent target band by mid-2024 as Treasury and the RBA forecast it to.
Economically, the tax cuts could add to inflation if it stays high. But politically, can Labor afford to deny middle Australia their turn for relief?