‘Disingenuous’: Inflationary trade-off in Jim Chalmers’ budget

Treasurer Jim Chalmers has sparked debate about his plan to deal with the cost-of-living crisis, with experts saying billions in slated relief will be inflationary.

Dr Chalmers is set to unveil $14.6 billion in cost-of-living support when he hands down his second budget on Tuesday night, including a mix of social security boosts and energy subsidies.

The relief package will relieve some pressure on families hardest hit by rapidly rising prices, but it has also raised fears the budget could have an inflationary impact on the broader economy.

Late on Monday, Dr Chalmers also revealed the budget was predicted to deliver a surprise surplus for the first time in 15 years — with a near $4 billion surplus predicted for 2022-23.

The treasurer’s second budget will unveil smaller deficits than forecasted, with a $143 billion reduction over the forward estimates.

But most of the increased revenue will be banked instead of answering calls for boosts to welfare payments with the interest bill on the debt set to hit $110 billion over the next five years.

Asked on Monday whether the budget would worsen inflation, Dr Chalmers said the government has calibrated its policies to avoid making the cost-of-living crisis worse.

One example he gave was that the government has introduced its electricity bill relief at the wholesale level, meaning it should mechanically lower inflation by reducing retail power bills.

“We recognise that people are under the pump,” he said on ABC radio.

“What we’ve done is we’ve carefully calibrated and designed this budget so that it takes pressure off the cost of living rather than adding to it.”

But does that explanation make sense?

Richard Holden, a professor at the University of New South Wales, said Dr Chalmers is being “disingenuous” about the impact of budget spending.

“The idea that policies like energy subsidies are not inflationary is just wrong,” Dr Holden said.

“There’s a bunch of money in people’s pockets that they didn’t previously have … that’s the same as writing them a cheque. There’s no debate about that.”

Budget will be inflationary

Dr Holden said the cost-of-living relief is not in itself a bad move, but the government should acknowledge there’s a clear trade-off between more support and reducing inflation pressures.

“There’s a trade-off. You’re worried about inflation and you want to help people,” Dr Holden said.

“The Treasurer has a very difficult job and I think it sounds like they will produce a very responsible budget.

“It’s just that one element of [saying you’re] pulling a rabbit out of a hat that’s disingenuous.”

The exact shape of cost-of-living relief in Tuesday’s budget is unknown.

But we do know there will be a boost in JobSeeker for those aged 55 and over, and a boost to single-parent payments that will extend eligibility for those with children until they reach 14 years, instead of eight.

About a quarter of all Australians on either JobSeeker or Youth Allowance in March were aged 55 and over, according to federal government data, meaning the lift will work around the edges.

About five million Australians will also benefit from the energy bill relief plan first announced late last year, with up to $500 set to be wiped from electricity costs for those on income support.

RBA efforts could be hindered

Veteran economist Saul Eslake said the budget programs would likely have a “marginal” impact on inflation, but that the cost-of-living package can’t be assessed in isolation from other policies.

He said RBA efforts to curb inflation by slowing demand could be, in principle, hindered by “significant increases in cash payments” to households, particularly those likely to spend it.

“In practice, it depends on how large the assistance is, relative to the size of aggregate demand,” he said.

“If the $14.6 billion is to be spent entirely in the 2022-23 financial year it would represent about 0.5 per cent of GDP – a number which is relatively small but which can’t be dismissed entirely when overall growth is likely to be forecast to be about 1.5 per cent.”

Mr Eslake said the mechanics of the energy bill relief would mean headline inflation will rise by less than otherwise, but other policies such as the increase in tobacco excise will likely be inflationary.

“The government’s proposals may have a marginal impact on inflation – but that is a risk the government is prepared to run in order to ‘manage’ the political issue of cost-of-living pressures, especially for the most vulnerable households,” he said.

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