Federal Budget 2024: Treasurer Jim Chalmers forecasts rosy inflation forecasts offer hope of interest rate cut

Treasurer Jim Chalmers will forecast conditions are ripe for a rate cut by the end of the year with his Budget showing inflation is expected to return to preferred levels earlier than previously thought.

He has also hinted at more cost-of-living support such as boosts to payments for pensioners and others on fixed incomes and an extension of the power bill rebates given last year.

The Treasury forecasts in Tuesday’s Budget books are far rosier than those the Reserve Bank released after its May meeting last week.

The Budget is forecasting headline inflation will be back below 3 per cent by the end of 2024 — a full year earlier than the RBA’s expectations.

It says the current financial year will post 3.5 per cent inflation before it drops to 2.75 per cent for 2024-25 and 2025-26.

Dr Chalmers says this shows the Government’s policy settings are helping.

“Whether it’s more competition for our supermarkets, whether it’s taking some of the edge off some of the bills that people have right now, what we’ve shown in the past and what we’ll show again on Tuesday, is our budget will put downward pressure on inflation, not upward pressure on inflation,” he said.

The Budget papers will also say there remains “considerable uncertainty around the outlook for the domestic and global economy”.

That uncertain outlook for inflation makes forecasting even more difficult than usual.

The March quarterly inflation figure came in at 3.6 per cent, although economists have highlighted high price increases in services areas such as insurance and education fees as worrying.

The RBA forecast inflation would sit at 3.8 per cent for the rest of the year, driven by higher petrol prices.

It expects this to drop to 3.2 per cent by mid-2025 and return to inside its target band by December 2025 at 2.8 per cent.

Central bank governor Michele Bullock warned the board was keeping a close eye on the data and if things didn’t improve, it may have to increase rates again later this year.

EY regional chief economist Cherelle Murphy said it was vital the Government prioritised fiscal discipline while inflation was still outside the 2-3 per cent target range.

“Disciplined fiscal policy, which works cooperatively with monetary policy and promotes productivity reform, will ensure we can grow our economy’s capacity, stabilise our debt and create a more positive future for generations of Australians,” she said.

Shadow treasurer Angus Taylor urged Labor to reinstate “fiscal guardrails” with a budget rule that spending growth had to be lower than economic growth to make sure it wasn’t adding to inflation.

That would shift the Budget away from “windfall surplus” to structural balance, he said.

“They should be restrained in spending, they should make sure … that the economy grows faster than spending. And that’s the exact opposite of what we’ve seen in the last two years,” he told ABC’s Insiders.

Dr Chalmers said he had a “laser focus” on getting inflation down.