The government expects headline inflation to return to the Reserve Bank’s target band by the end of 2024, according to Tuesday’s budget papers, significantly earlier than both economists’ and the RBA’s expectations.
Treasurer Jim Chalmers painted an optimistic picture of the Australian economy while presenting Labor’s third budget on Tuesday evening.
“We have an envied combination of moderating inflation, record new jobs, near‑record participation, real wages growth, the lowest‑ever gender pay gap, and expanding business investment,” Chalmers said.
“Annual inflation has more than halved from its peak in 2022 and it’s now lower than anticipated in the mid‑year update but we know people are still under the pump. That’s why we designed our cost of living policies to ease these pressures and take another 0.75 of a percentage point off inflation this year, and 0.5 a percentage point next year,” he continued.
“Treasury is now forecasting inflation could return to target earlier, perhaps even by the end of this year.”
According to the budget documents, the government is confident that despite “considerable uncertainty” around the outlook for the domestic and global economy, its “responsible cost-of-living measures” could see headline inflation drop earlier than expected to 2.75 per cent possibly by the end of the calendar year, but more likely by the end of financial year 2024-25.
Inflation currently stands at 3.6 per cent, as at end March, with the RBA predicting it won’t return to its target range until next year. In fact, the central bank expects inflation to pick up to 3.8 per cent by mid year and remain there until the end of the year.
On employment, the budget states “employment is forecast to continue to grow, albeit at a more modest pace and by less than the growth in the size of the labour force”.
It adds that leading indicators of employment growth, such as job advertisements and vacancies, have consistently declined from record highs in mid-2022, which is expected to lead to a gradual rise in the unemployment rate, which is forecast to be 4.5 per cent in the June quarter 2025.
In his budget speech, the Treasurer applauded the addition of around 780,000 jobs under this government, noting that it’s “a record for any first term”.
“This is stronger jobs growth than in any major advanced economy,” he said.
“Real wages are growing again for the first time in almost 3 years. Business investment is now expected to record its longest annual expansion since the mining boom.
“And we’re addressing the pressures caused by population growth, with net overseas migration next year now expected to be half what it was last year.”
Second surplus
In addition to his confident inflation predictions, the Treasurer celebrated the government’s second consecutive surplus, following a $22.1 billion surplus in 2022–23.
A second surplus of $9.3 billion (0.3 per cent of GDP) is expected in 2023–24, an improvement of $10.5 billion since MYEFO, he said.
The back-to-back surpluses reflect the government’s discipline to return 96 per cent of tax upgrades to budget in 2023–24 and 82 per cent of tax upgrades since the Pre-election Economic and Fiscal Outlook 2022 (PEFO) over the forward estimates period.
However, looking forward, things get a little more sombre, with the Treasurer forecasting a deficit of $28.3 billion in 2024–25.
“We are expecting a deficit of $28.3 billion in 2024–25. But a stronger fiscal outcome in every year, compared to when we came to government,” Chalmers said.
“On our watch, the budget is $215 billion stronger over the six years to 2027–28.”
Gross debt, the Treasurer announced, is now expected to peak at 35.2 per cent of GDP in 2026–27 before declining to 30.2 per cent by 2034–35.
“This year gross debt will be $904 billion instead of the more than $1 trillion we inherited. Meaning debt is $152 billion lower,” he said.
On economic growth, the Treasurer admitted it is expected to remain subdued over the forecast period.
Real GDP is forecast to grow by 2 per cent in 2024–25, 2.25 per cent in 2025–26, and 2.5 per cent in 2026–27.
However, he confidently remarked that higher wages growth, the forecast moderation in inflation, continuing employment growth, and the government’s cost-of-living tax cuts should support real household disposable incomes and a recovery in household consumption.
