Leading economists tell Treasurer Jim Chalmers Budget handouts will only worsen inflation

Treasurer Jim Chalmers has been warned extra Budget handouts during an oil crisis will only fuel inflation, as Labor also braces to break an election promise on tax.

Ahead of Tuesday night’s Budget, leading economists fronted the National Press Club in Canberra on Thursday to warn the Federal Government against aggravating inflation with even more spending during a time of global uncertainty.

The Middle East conflict has already seen Labor temporarily halve fuel excise to 26.3 cents a litre, until the end of June.

Income tax offsets of $200-$300 are also in the mix, along with a possible revival of a COVID-era policy allowing businesses to “carry back” losses from this financial year against profits in two previous financial years to get tax refunds, as reported in The Australian.

“This Budget is being asked to do a number of important jobs all at once and if you think about the developments in the last few months in the Middle East, that has forced us to recalibrate elements of the Budget,” Dr Chalmers told Sky News on Thursday.

But big spending policies to address the latest global economic crisis are simply adding to inflation, Barrenjoey chief economist Jo Masters said.

“This expectation that government will support right across the spectrum of the things that we need and want — and you add crises in — ultimately, that’s why we have an inflation problem in this country,” she said.

“We have too much demand for the capacity of the economy to support it and part of the reason for that is that we’ve never really allowed the economy to have a downturn through the number of shocks we’ve had just in the last five or six years.”

Since the COVID pandemic in 2020 and Russia’s Ukraine invasion in 2022, Federal Governments from both sides of politics have responded by cutting taxes or splashing stimulus, which Grattan Institute chief executive Arun Sathanapally said was unsustainable.

“Our Budgets need to start to build a form of resilience that isn’t simply - ‘Well, we’ve got to stop doing everything else because we’ve got a fuel shock on right now and we’re going to throw everything at dealing with the fuel shock’,” she said.

“We have to be able to progress a lot of our long-term reforms, while also thinking about how we deal with a world that is fundamentally different and is going to throw these sorts of shocks at us, in all likelihood more frequently.

“We just have to find a way to manage it in a way that’s sustainable over the long term.”

Westpac chief economist Luci Ellis, who previously spent three decades at the Reserve Bank of Australia, said public spending as a share of the economy had been growing for the past decade, when private sector beneficiaries of Federal and State government spending were factored in.

“Once you allow for those indirect effects, there’s been a very substantial increase in the size of the footprint of public sector over the past 10 years,” she said.

Dr Ellis also warned about stimulating demand, during a discussion about potential $300 tax offsets, arguing the global oil crisis would boost Federal Government revenue as a liquefied natural gas shortage saw it collect more from company taxes.

“What you don’t want to be doing is just saying what we need to do is boost some demand here,” she said.

“For that brief period, some people will be worse off.”

Labor is already bracing for the political fallout from its plan to dilute the 50 per cent capital gains tax concessions and restrict negative gearing for investor landlords who make a rental income loss.

“The responsibility is to explain why the change of view, why the Government has come to a different view and if there are changes in that regard on Budget night, then that’s what I intend to do, to explain why the Government’s come to a different view,” Dr Chalmers told Sky News on Thursday.

“We will explain that, we will be upfront - what matters most is that governments take the right decisions for the right reasons, taking into consideration pressures and concerns people are facing.”

The ALP lost the 2016 and 2019 elections with a plan to halve the CGT discount to 25 per cent and there’s speculation it will be diluted to a more moderate 33 per cent in Tuesday night’s Budget, despite Prime Minister Anthony Albanese vowing there would be no changes ahead of the 2022 and 2025 elections.

Negative gearing is also expected to face new restrictions, seven years after Labor lost an election with a proposal to restrict it to new homes.

With the typical Australian house now costing more than $1 million - making it only possible for couples or high-income earners to buy — Dr Chalmers suggested Labor needed to act to help younger people get into the housing market.

“It’s really clear to a lot of Australians that the housing market and the tax system is making it harder for people, particularly for younger people,” he said.

“One of our motivations is to make it easier for more people to get into the housing market.”

The Treasurer said he wanted more owner-occupiers in the housing market, instead of investors consistently outbidding young buyers at auctions.

“I think it’s very clear that as important as that is, we also need to focus on the composition of the housing market,” Dr Chalmers said.

“The percentage of owner occupiers has gone down significantly.

“Our motivation there is not to make judgements about people who have done well but to make it easier for people who feel locked out of housing because of the way that our housing market and our tax system interacts.”

Dr Chalmers also hinted a proposal to allow businesses to carry over losses from this financial year to earlier, more profitable years was about boosting productivity and encouraging investment.

“It’s ambitious across the board and what I mean by that is a Budget might be focused on productivity, it might be focused on tax reform, on significant Budget savings and sustainability, on fuel security,” he said.

“We need to lift the speed limit in the economy.”

The Treasurer has also written to State premiers and Territory chief ministers asking them for support to amend the Competition and Consumer Act so businesses can collaborate on fuel supplies without breaking the law.

The Australian Competition and Consumer Commission can make exemptions but Dr Chalmers argued “the current processes for these are not appropriately adapted to a fast-evolving, economy-wide shock”.

Inflation grew by an annual pace of 4.6 per cent in March, or a level well above the Reserve Bank’s 2-3 per cent target.

Productivity last year grew by just 1 per cent.