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Budget 2024: Economists warn cost-of-living relief could worsen inflation

ACTU reacts to the federal budget

Source: Michele O’Neil

Treasurer Jim Chalmers has sought to have his cake and eat it too, delivering a budget on Tuesday night that seeks to deliver billions in cost-of-living relief while also hoping to ease inflation.

But some experts are sceptical, saying the $300 energy rebate for all households alongside massive income tax cuts for millions could actually worsen price pressures.

And that could make the Reserve Bank’s job more difficult because it’s trying to squeeze the economy with higher rates to ease prices.

Committee for Economic Development of Australia (CEDA) chief economist Cassandra Winzar told TND there’s “a lot of spending in the budget and a lot of it is not particularly targeted”.

“It’s really broad-based and will go to a lot of people who don’t really need it,” Winzar said.

“They haven’t quite hit the mark on reducing inflation.”

All told, the budget contains more than $24 billion in new spending over the next five years, with billions front loaded over the next 12 months to ease power bills, rents and medicine costs.

Despite that, Treasury projects inflation will fall back to 2.75 per cent from 3.6 per cent in 2024, with subsidies designed to reduce the Consumer Price Index (CPI) by 0.5 percentage points.

That budget calculus has allowed Chalmers to claim the government is helping families deal with the cost-of-living crisis in the short term while also addressing underlying causes – which will be key to the political fortunes of the government before the 2025 election.

“The No.1 priority of this government and this budget is helping Australians with the cost of living,” Chalmers said.

“Responsible relief that eases pressure on people and directly reduces inflation.”

But experts have warned such claims are actually an “accounting trick” that will only ease inflation as measured by the Australian Bureau of Statistics  and will be ignored by the RBA board as it considers when to begin cutting interest rates.

Economist Chris Richardson said the budget would indeed “poke the inflationary bear”, with $17 billion in new spending over the next year alone.

“This budget narrows the Reserve Bank’s already narrow path,” he said.

Winzar said central bankers will “look through” measures like energy bill rebates because while they may reduce inflation when they are brought in, the opposite will happen when they expire.

“What’s likely to happen is households will spend that money elsewhere, which will drive up inflation in other sectors,” Winzar explained.

Housing funding

The budget has received backing in other areas, however, namely on addressing the housing crisis, with billions in new funding allocated to the construction of social and student housing.

The plan includes $423.1 million in new spending over five years from 2024-25 for a new agreement with states and territories to build more social housing and improve homelessness services.

Additionally, $88 billion in funding has been allocated over three years from 2024-25 to fund 20,000 fee-free training places for the construction sector – a bid to address fears that the workforce is not prepared for the government’s 1.2 million new homes target.

Winzar said the housing measures were “quite good” but that there are still concerns about whether the government will be able to meet its ambitious home construction target over the next five years.

“Despite the new measures in the budget, there’s still not enough being done to address barriers to housing supply,” Winzar explained.

Superannuation

Reforms to the nation’s superannuation system have also been welcomed, with fresh spending allocated for including retirement payments on paid parental leave and a crackdown on fraud.

The budget allocates $1.1 billion in funding over four years from 2024-25 to add super to Commonwealth-funded Paid Parental Leave.

Eligible parents will receive additional payments based on the 12 per cent Superannuation Guarantee.

A further $10 million has been set aside to help small businesses administer the changes.

Super Members Council boss Misha Schubert said paying super on parental leave will boost savings of a mother of two by about $14,500 in retirement, with 180,000 families to benefit a year.

“The historic announcement to pay super on parental leave takes Australia another major stride closer to ending the financial motherhood penalty many women face when they have children,” she said.

“It’s a watershed reform that will powerfully strengthen retirement savings for Australian mums and help to narrow the gender gap at retirement.”

Budget Winners

  • Lower-income households – more energy bill assistance on the way
  • Small businesses – energy bill rebates and extension of asset write offs
  • Renewable and other energy companies – tax breaks and other incentives for investment
  • Renters – second year of increases in Commonwealth Rent Assistance.

Budget Losers

  • JobSeeker and youth allowance recipients – no across-the-board increase despite recommendations
  • Foreign companies and residents – more funds to address tax avoidance and strengthening capital gains regime
  • Environment – no major disbursements to address damage such as reef bleaching, species extinction
  • Regional health care – focus on regional infrastructure leaves communities in the bush disappointed.
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