Federal Budget 2024: Economists push back on Chalmers’ ‘inflation-busting’ cost-of-living measures

Economists have warned Treasurer Jim Chalmers’ cost-of-living measures in this year’s Federal Budget will likely push the Reserve Bank to keep rates on hold for longer as it was revealed wealthy Australians with multiple properties will be able “quadruple dip” the new $300 power price rebate.

Despite claims by Dr Chalmers that the $7.6b cost of living package, mainly comprised of the energy rebate and rent assistance for the most vulnerable Australians, would bring inflation down, economists warned the RBA would likely remain cautious.

Analysts at the Commonwealth Bank said the RBA was likely to hold-off a rate cut even if inflation slid to 2.75 per cent in the 2024-25 financial year as forecast by Treasury.

Fiscal policy, set by the Government, was a key risk in delaying CBA’s major case that rate cuts would start from November, CBA chief economist Stephen Halmarick said.

“This risk is now more real,” he told The Nightly.

That assessment follows global credit agency S&P arguing that Dr Chalmers’ Budget measures would delay rate cuts until next year.

It came as Opposition modelling showed more than $300m of the $3.5b energy bill support would go to empty homes and that $1.4m would go to 4,630 Australians worth over $100m.

“There are serious questions for Anthony Albanese to answer about why multi-millionaires can seemingly double, triple, quadruple-dip on this $300 payment,” said Deputy Leader of the Opposition, Sussan Ley.

“Australians deserve to know just how much of this $3.5 billion program is funding energy relief for millionaires owning empty homes.”

The Federal Opposition has lashed the Budget as giving “billions to billionaires”, targeting the cost of living measures and the Future Made in Australia plan to create a “renewable energy superpower” by pledging almost $32b over 14 years for production tax credits for critical minerals processing and green hydrogen.

Dr Chalmers’ third Budget contained generous immediate handouts to all Australians in the form of Stage 3 tax cuts and the cost of living relief while also unveiling Treasury figures that show the economy reaching the target inflation band before the end of the year.

However if the RBA keeps rates on hold into 2025 — which some economists had already suggested — it will apply further pressure on Dr Chalmers into an election year following his Government’s pledges to lower inflation and deliver cost-of-living relief.

Though the Treasurer often reiterates he does not second guess the decisions of the RBA, the widespread expectation is that the Budget and Government spending should work in tandem with the RBA’s aims. If the inflation rate is lowered, then the RBA theoretically would be able to consider interest rate cuts.

“The bottom line is that the economy will basically still struggle,” National Australia Bank chief economist Alan Oster said.

Dr Chalmers maintains that the inflation rate will be brought down through the $300 universal power credits and via a 10 per cent bump in caps to Commonwealth Rent Assistance.

“In terms of inflation, yeah, you bring down the headline, but the Reserve Bank will completely ignore that — well, they should,” Mr Oster on Wednesday said.

The RBA prefers to look at core, or underlying, inflation, which removes elements with strong price movements from the consumer price index’s calculation.

But, as KPMG chief economist Brendan Rynne explained, while energy bills will be temporarily lower, and Dr Chalmers is technically correct, it is not fully accurate to say the rebates cut inflation.

“The production costs associated with supplying energy are unchanged; it is just the price paid by customers through their energy bill is lower because of the rebate,” Dr Rynne said.

“Once the rebate is withdrawn the prices paid by households will rebound ... and inflation will increase again.”

AMP chief economist Shane Oliver said the Budget’s stimulus measures risked boosting demand, particularly when combined with State measures. Queensland is handing out $1000 in power bill relief, WA $400 and $250 to parents of school children, while Victoria is also giving parents cash, but no power relief.

“The direct lowering in measured inflation from cost of living measures will be welcomed by the RBA, but it will be wary of the rise in new stimulus,” Dr Oliver said.

“The net effect adds to the risk of higher for longer interest rates but is probably not enough to change our forecast for a rate cut later this year.”

Economists are also concerned about what they see as a lack of fiscal discipline in the Budget, with additional spending adding about $9.5b to the forecast deficit for 2024-25, with deficits hanging around for the remainder of forecast years to 2027-28.

“The size of the deficits in 2024-25 and in the outyears are much larger than we had expected and imply more of an expansionary force to the economy, particularly over the next two years,” Mr Halmarick said, adding that while some were unavoidable, others were deliberate.

“This will impart a larger expansionary force to the economy than we had expected,” he said, emphasising the risk it posed for CBA’s expectations for rate cuts to start in November.

EY chief economist Cherelle Murphy said with the billions in new spending from July 1, “the Budget has thwarted the task of tightening the structural deficit”.

“We are concerned the Budget doesn’t adequately account for the second-round impacts of the household assistance on spending,” she said.

“When combined with the personal income tax cuts, and cost-of-living measures currently being rolled out by state governments, we see a renewed threat to the core inflation.

“This Budget discards fiscal discipline, structural repair and policy reform, and does little to drive productivity growth.”

Mr Oster agreed that Government spending priorities were having an impact: “I think the policy generally is much more interventionist than what we’ve seen for a long time.”

Dr Oliver said this year’s expected surplus — like all those since 2020 — was due to extra revenue from higher taxes and commodity prices.

“This is not smart management but good luck flowing from conservative forecasts,” he said.

Westpac chief economist Luci Ellis — a former RBA assistant governor — was more circumspect about changes to expected timing of rate cuts, saying Dr Chalmers’ Budget decisions “should not materially shift the timing of RBA decisions on rate cuts”.

But Dr Ellis did say new spending was additional stimulus, but another surplus could not be ruled out given particularly conservative forecasts for commodity prices.