Jim Chalmers told major surgery needed to cut $100 billion from the budget

AMP chief economist Shane Oliver has urged Treasurer Jim Chalmers to cut $100 billion from the Federal Budget to help fight inflation.

Dr Chalmers has just a few weeks to put the finishing touches on what he has pledged will be a reform budget boosting productivity and strengthening the economy.

But his plans have already been hit by a storm with inflation rising to 3.7 per cent and conflict in the Middle East disrupting major industries.

The Treasurer has already flagged plans to trim the National Disability Insurance Scheme — which was growing at more than 10 per cent a year.

It follows a dramatic increase in government spending as a share of the economy since COVID-19 to the highest level in 40 years at about 28 per cent — adding to demand and drawing workers from the private sector.

“This surge in public spending has left little room for a pickup in private spending — consumer, home building and business investment,” Dr Oliver said.

“When (the pick up) occurred last year the economy quickly ran up against capacity constraints and hence a rebound in inflation.

“Federal spending has been part of this surge.”

Dr Oliver said about $100 billion would need to be cut across four years to get public spending back to 25 per cent of national output.

The number sounds huge but compares to about $3 trillion which the Government would be dishing out across the same four-year period.

“This would require cuts to the NDIS,with the Government looking like it might move in this direction, more aggressive cuts to the public service and more means testing of welfare,” he said.

Cost of living relief needed to be limited to about $5 billion to prevent worsening inflation and pushing interest rates higher, he said.

Financial markets already consider two more hikes by the Reserve Bank likely this year — driven partly by the experience of the 1970s, when oil shocks contributed to prolonged cost of living pain. Easy RBA policy at the time allowed inflation to become entrenched.

Dr Chalmers on Monday pitched an “ambitious” budget — to be handed down on May 12 — that would reduce compliance costs, generate savings and increase productivity.

“This Budget will be a responsible budget. It will be focused on resilience and reform,” he said.

ANZ head of Australian economics Adam Boyton expects a deficit of $36b next financial year, which will continue to push pressure into the economy.

Higher gas prices would lift revenue by $10b to $12b but spending will likely grow faster, he said.

“We think that ongoing program cost pressures and new measures will more than offset any expense savings in the budget,” Mr Boyton said.

There’s also been speculation the Federal Government will rejig the tax system with changes to the capital gains discount and negative gearing on the radar.

Dr Oliver said there was merit in the proposals but the Government would need to focus on indexing income tax so workers were not penalised by inflation pushing them into more severe tax brackets.

“Just fiddling with a few tax concessions in the budget will amount to nothing more than a tax hike, will likely make the tax system even more progressive working against incentive and do little to relieve housing affordability or intergenerational equity beyond appearances,” he said.

“What is needed is simple. Much lower personal tax rates with higher thresholds; a lower corporate tax rate; a higher and more comprehensive GST; compensation of low-income earners and welfare recipients for increasing the GST; the indexation of tax brackets to inflation; and the removal of stamp duty and its replacement with land tax.”