Jim Chalmers promises an ‘inflation’ budget. Whether he can deliver is an open question

Treasurer Jim Chalmers got some gloomy news today.

ANZ Bank today became the last of the four big commercial banks to predict official interest rates will increase on May 5, one week before Dr Chalmers’ fifth budget.

The timing is awkward for the treasurer. The opposition, backed by credible independent economists, blame the government for the stoking the fires of inflation, which is driving up interest rates.

A second rate rise this year would further damage the image of economic competency Dr Chalmers has carefully cultivated over his four years in power. Which helps explain why the treasurer has begun framing his major economic policy document for 2026 as an inflation budget.

“The Government is very focused on this inflation challenge,” he told ABC radio Thursday morning. “It’s a big part of our thinking in the lead up to the budget in May.”

This budget, which is being formulated now, is the best chance – perhaps the only significant opportunity this year – for the federal government to contribute to the inflation fight.

By cutting spending or raising taxes, Dr Chalmers could reduce upward pressure on prices. The Albanese Government has been reluctant to do either in any substantial way.

‘Savings’ myth

On Thursday, Dr Chalmers repeated a refrain from the government that it has “found $114 billion in savings”. The claim, which implies large spending cuts, is misleading.

Liberal Senator James Paterson secured an acknowledgement from Finance Minister Katy Gallagher early this month the figure includes “reprioritisations”. “We’re saving and then, essentially, to offset new priorities,” she told him.

In other words, the government spent money on different stuff and pretended it was cutting spending.

Until now, Dr Chalmers has been able to present spending increases he’s been prepared to acknowledge - about $111 billion since Labor was elected - as a responsible response to a weak economy.

The inflation surge has left him with nowhere to hide, which likely explains why he has allowed expectations to rise the budget will increase taxes on property investors through changes to the capital gains tax.

The Federal Treasury would like to reduce the tax break on investment properties from 50 per cent to 33 per cent, journalist Phillip Coorey wrote in the Financial Review yesterday. Governments sometimes leak proposed policy changes to see if they generate much opposition.

The age gap

The change would reduce the profitability of one of Australia’s most popular investments. The average owner sells out after nine years, according to the e61 Institute, an economics think tank, usually banking on an increase in the value of their house or apartment in return for subsidising their tenants’ rent, a practice known as negative gearing.

Gains on shares or other investments are taxed just like income from a job. Gains in the value of the home you live in are not taxed, which may be the greatest tax break left.

Even though experts say the existing tax rules have little effect on the availability of houses and apartments (because land ownership is separate to occupancy), critics say they favour older people who bought property when it wasn’t so expensive.

Dr Chalmers hasn’t publicly expressed a view on whether the tax should be changed, but alluded to the difficulty young people have living in a country where the average home last year hit $1 million.

“We do understand that there are intergenerational issues in the tax system and in housing,” he said Thursday morning.

Other options

As the government’s gross debt heads to $1 trillion this year, cutting the capital gains discount to 25 per cent would raise about $6.5 billion extra a year, according to the Grattan Institute, a think tank. That’s about 1 per cent of all tax revenue.

In other words, it would be too little, too late to have much of an effect on inflation. But it would allow Dr Chalmers and Anthony Albanese to claim they have done two important areas of policy reform: tax and housing.

Meanwhile, costs for Australians would keep rising.

There is another way. The government could cut back on welfare, wage subsidies and the public service. Balancing the budget would be fairer on taxpayers and good for the economy.

But it might cost votes, which is not on this government’s agenda.