Chalmers unleashes billions more in spending threatening inflationary rebound

Billions of dollars of additional spending unveiled by Treasurer Jim Chalmers in Tuesday’s federal budget could risk stoking price pressures, even as fresh Treasury forecasts showed inflation could ease enough for the Reserve Bank to cut rates this year.

Updated estimates unveiled in the May budget showed headline inflation could return within the Reserve Bank’s 2 to 3 per cent inflation targeting band by year’s end – a full year ahead of the central bank’s own projections – and giving governor Michele Bullock latitude to cut rates sooner than expected.

However, at a time when the Reserve Bank is trying to tame stubbornly persistent price pressures, the Albanese government plans to tip an additional $24bn in net spending into the economy, over the four-year forward estimate period.

More than 80 per cent of the spending, including $9.5 billion in 2024-25 and a further $10.3 billion in 2025-26, will be unleashed into the economy over two years from July 1.

The spending comes on top of a $22bn cash splash in last year’s federal budget over the 2023-24 and 2024-25 financial years.

Included in the cash splash is $3.5bn in slated energy bill relief, which will shave $300 off every households’ power bill next financial year.

While the support is expected to lop 0.5 percentage points off measured inflation, the measure risks adding to spending elsewhere in the economy and keeping prices elevated even longer.

RBA governor Bullock has previously warned that an untargeted spending spree by federal and state governments could further stoke inflationary pressures, a risk which in turn could push interest rates even higher.

“They want to help us beat inflation so they don’t want to try to add to inflationary pressures, but we will have to see what the budget comes out like,” Ms Bullock told reporters in Sydney last week.

Reacting to the increase in net spending, veteran budget economist Chris Richardson said the expansionary budget risked “poking the inflationary bear”.

“The government said it would be careful not to frontload its new costs. But that’s exactly what it did – and its new dollars are both big and fast,” Mr Richardson said.

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

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HSBC chief economist Paul Bloxham said while rental and energy subsidies would “mechanically lower” rents and electricity inflation, the measures announced by Dr Chalmers would ultimately add to inflation.

“Clearly the subsidies also boost real household disposable incomes — giving households more income to spend. Many households that receive these subsidies are also likely to be up against their budget constraints — due to cost of living pressures,” Mr Bloxham said.

“We expect some of this additional income will be spent, supporting consumer demand and adding to inflation.”

As a result of the jump in net spending, overall payments are expected to jump 3.4 per cent next financial year to $734.5bn, or 26.6 per cent of GDP, primarily due to demands across the National Disability Insurance Scheme, defence, health and aged care, and interest payments on government debt.

While Tuesday’s budget showed a surplus of $9.3bn – the second consecutive surplus in almost two decades – mounting spending pressures and dwindling receipts are expected to deepen deficits over the forwards, with a quartet of budget deficits cumulatively worth $112.8bn – an $11.8bn deterioration on December’s forecasts.

The budget is not expected to then return to surplus until 2034-35.

As the nation’s finances sinking further into the red, gross debt will push north of $1 trillion by 2025-26, or 35.1 per cent of GDP, while net debt – a more widely used measure of the Commonwealth’s abilities to repay its debts – will climb to $697.5bn by 2027-28, 21.9 per cent of GDP.

Stripping way the cyclical impacts of temporary impacts to the bottom line, including record personal income tax collections and surging company tax receipts, the budget remains structurally in deficit.

With the budget forecasts showing inflation will retreat sooner-than-expected, workers are expected to enjoy a real wages growth, the forecasts show. Pay packets will grow at an annual rate of 3 ¼ per cent from in the two years to mid-2026, before rising to 3.5 per cent in the two years following

However, despite a more optimistic inflation outlook, economic growth is expected to be weaker in the near term, with the economy expanding by just 2 per cent next financial year and remain sluggish through the forwards.