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Chalmers digs in despite warning bells

Treasurer Jim Chalmers is confident with his cost of living plan. Picture: NCA NewsWire / Martin Ollman

Treasurer Jim Chalmers has defended billions of dollars in additional measures unveiled in Tuesday’s federal budget, amid concern from economists that the increased spending could keep inflation higher for longer and delay rate cuts.

“We’re doing what we can to manage the budget responsibly and put downward pressure on inflation,” Dr Chalmers told the National Press Club on Wednesday.

“I’m confident that’s what we have done in this budget.”

While a number of economists have labelled the budget as expansionary, and warned it would rub up against the RBA’s inflation fighting efforts, the Treasurer was adamant it would help reduce price pressures.


“The very firm advice from our departments was that the budget and particularly the cost of living package will put downward pressure on inflation without adding to inflationary pressures elsewhere in the economy.”

Treasurer Jim Chalmers delivered the annual post-budget reply address in Canberra on Tuesday. Picture: NCA NewsWire / Martin Ollman

But responding to Dr Chalmer’s tax and spend plan, ratings agency S&P global said Dr Chalmers’ third budget had loosened the purse strings, and that the increased spending, including rent assistance and universal electricity rebates, could be “mildly inflationary”.

“Consequently, the “last mile” of the Reserve Bank of Australia’s (RBA) inflation fight could remain challenging,” S&P analyst Martin Foo said.

“We no longer expect the RBA to cut its policy rate in 2024.”

Commonwealth Bank’s head of Australian economics Gareth Aird agreed that the “expansionary” budget risked pushing out expected rate cuts, and when they did occur, they would not be as deep.

“The risk is now more real that the first interest rate cut could be delayed and that the neutral cash rate is higher than we currently estimate due to the expansionary fiscal setting and the high level of investment in the economy,” he said.

With Dr Chalmers presiding over $24.4bn in new net spending, Jarden chief economist Carlos Cacho said the budget risked putting upward pressure on inflation just as it was returning to the Reserve Bank’s 2 to 3 per cent target.

Economists agree on inflation claims Chalmers
EY’s Cherelle Murphy, Commonwealth Bank’s Gareth Aird, and KPMG’s Dr Brendan Rynne said the federal budget was expansionary. Picture: Supplied.

“Whilst the government argues that cost-of-living support measures such as energy and rent subsidies will bring down CPI, we fear they are likely to stoke broader inflation,” he said.

Combined with higher spending by the states and territories, Mr Cacho estimated the budget would add $30bn in fiscal stimulus to the economy.

Of the additional net spending, in excess of 80 per cent – or $19.8bn – will be dished out in the two years from mid-2024.

KPMG chief economist Brendan Rynne said even as the government’s interventions to lower household energy bills would lop half a percentage point off measured inflation, consumers would ultimately still pay the price as soon as they were reversed.

“As soon as the rebate is withdrawn the prices paid by households will rebound and inflation will kick up again,” Dr Rynne said.

“It is not a budget for the ages, but rather one to see the government through to next year, seemingly hoping that the ‘smoke and mirrors’ impact on inflation holds out until after the election.”

NAB senior economist Taylor Nugent said any impact of rental and energy subsidies would be discounted by the central bank, which would instead focus on underlying price pressures.

“The RBA should look through the mechanical impact of these subsidies,” Mr Nugent said.

Not all economists were convinced that the federal budget would exacerbate cost of living pain. Picture: NCA NewsWire / Martin Ollman

EY chief economist Cherelle Murphy said the budget had not adequately accounted for the fact that savings generated from rebates would be spent elsewhere, particularly by those who had not been squeezed by higher interest rates.

“When combined with the personal income tax cuts, and cost-of-living measures currently being rolled out by state governments, we see a renewed threat to core inflation,” she said.

However, not all economists shared the view that the interest outlook had been altered by the federal budget.

“We see no material implications for our RBA views stemming from the budget,” Deutsche Bank’s Australian chief economist Phil O’Donaghoe said.

Similarly, ANZ’s head of Australian economics, Adam Boyton said the additional spending announced on budget night was as expected, and had no direct impact on his growth, inflation or interest rate forecasts.

Former RBA assistant governor and now Westpac chief economist Luci Ellis said while the impact on inflation from the budget was difficult to ascertain, it wouldn’t knock the RBA off track.

“Most of [the additional spending measures] will probably be a wash in terms of the Reserve Bank’s decisions and we still expect them to be able to start cutting the cash rate from about November this year,” Dr Ellis said.