‘Slightly less terrible’: Why the budget won’t worsen inflation

A $14.6 billion dollar cost-of-living relief package in Tuesday’s federal budget has sparked fierce debate about whether Treasurer Jim Chalmers has worsened inflation by supporting families.

On Thursday night, Opposition Leader Peter Dutton accused the Albanese government of delivering an inflationary budget that will make the likelihood of another painful interest rate hike from the Reserve Bank more likely, seizing on comments from economist Chris Richardson.

Mr Richardson had earlier said that the budget had “raised the chance” the RBA would “do another swing of the baseball bat” because households had been handed extra income.

That led Mr Dutton to accuse Labor of delivering a “big spending budget that will only fuel inflation and make life harder for millions of Australians”.

But Commonwealth Bank economist Gareth Aird said budget spending will “not add inflationary pressure” to the economy, which is already slowing on the back of 11 mortgage bill hikes delivered by the RBA since last May.

“We have not changed our forecast profile for inflation or our call on the RBA,” Mr Aird said.

“Our central scenario puts the current 3.85 per cent as the peak in the cash rate, while the near term risk sits with another rate hike.”

‘Smart politics’

The budget contained a raft of measures designed to help struggling Australians including a $20 a week increase in JobSeeker payments, energy bill subsidies and a rise in Commonwealth rent assistance.

Mr Aird said a key reason Dr Chalmers’ budget won’t worsen inflation, despite delivering billions of dollars in extra income into the budgets of millions of households, is policy design.

He credited the government with unveiling support that’s “both smart politics and smart economics”, specifically referring to its energy bill relief package and medicine cost reductions.

Basically, the government has designed energy bill subsidies worth up to $500 so they kick in at the wholesale level, reducing the price of retail bills in a way that will reduce headline inflation.

“The assessment of whether a budget is inflationary or not becomes more nuanced if some policies that provide financial assistance to households also limit the direct and measured impact on the CPI,” Mr Aird said.

“That is what happened in the 2023 Budget.”

And while experts have told TND this week that such an argument is “disingenuous” because ultimately households still receive an income boost, Mr Aird said that’s not the whole story.

“Inflation expectations are a driver of inflation over the medium term. And inflation expectation can be heavily influenced by actual inflation,” he said.

“Lowering measured inflation in the short run at a time when there remains lingering concerns around inflation psychology makes a lot of sense.”

“It is both smart politics and smart economics.”

‘A bit more purchasing power’

Sean Langcake, head of macro-economic forecasting at BIS Oxford, said that while the budget was a “loosening of policy” in a strict academic sense, it’s unlikely to move the inflation needle significantly in practice, or change the interest rates outlook.

“You are giving households a bit more purchasing power, and in the strictest sense of thinking about things that is inflationary,” Mr Langacke said.

“But we might lose the forest through the trees a little bit if we don’t think about the quantum of the increase [in spending] … I don’t really think it changes the inflation dynamic.”

Mr Langcake said it’s important budget decisions aren’t merely viewed through the inflation lens, with the government also needing to prioritise helping lower-income families with living costs.

“We’re talking about household budgets that are already really stretched, this is not going to make the difference for them going to spend a lot more on discretionary items,” he said.

“You’re moving some household budgets out of the fire and back into the frying pan, things are going from really terrible to slightly less terrible.”

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