investor daily logo

Economist says budget hurting inflation, Treasurer disagrees

5 minute read

Treasurer Chalmers has contrasted an economist’s argument that persistent inflation underscores the government’s role in complicating the RBA’s job, maintaining instead that Labor’s policies are effectively curbing inflation rather than exacerbating it.

With the commencement of several cost-of-living budget measures on 1 July, Treasurer Jim Chalmers has assured that tax cuts and energy bill relief for every Australian are “helping” to quell inflation, not stoke it.

“We’re confident but not complacent about our progress in the fight against inflation. Inflation is still too high, but it’s much lower than what we inherited from the Coalition, and we know that our policies are helping,” Chalmers said over the weekend.

“Last week we heard from the Bureau of Stats and the ACCC which said that our cost-of-living help is putting downward pressure on prices and downward pressure on inflation – we’ve seen that in electricity, we’ve seen that in early childhood education, we’re seeing it in rent as well.


“This is all about making sure that our cost-of-living help is meaningful and substantial but responsible as well in the context of this fight against inflation.”

Despite assurances from Treasurer Jim Chalmers, AMP’s chief economist, Shane Oliver, believes Australia’s persistent inflation highlights “the role Australian federal and state governments have played in making the RBA’s job harder”.

“While average households have cut back their spending as the RBA wants to happen, public spending across federal and state governments has gone up adding to demand in the economy and competing for workers and ultimately keeping inflation and hence, interest rates higher than otherwise would have been the case,” Oliver said.

“The changes to the 1 July tax cuts by adding $800 a year to the size of the tax cut for a worker on average earnings also added to the risk that the tax cuts will be inflationary.”

The RBA itself flagged for the first time in its post-board meeting statement earlier this month that recent budgets may have an impact on demand.

Expounding on this during her media conference, governor Michele Bullock stated that the board considered the collective impact of the federal and state budgets on the economy.

Warning that the substantial budgets risk stoking demand, Bullock said achieving the inflation target would be a “slow grind”.

Chalmers hastily responded with: “I don’t tell [Bullock] how to do her job, and the governor doesn’t tell me how to do my job”.

This week, Chalmers reiterated his stance and once more declined to acknowledge the potential inflationary impact of the budget, choosing instead to draw comparisons with inflation trends seen in other countries.

“We’ve seen around the world, earlier in the year, inflation went up a couple of times in the US before it came down again,” he said.

“In recent days we’ve seen inflation go up in Canada, core inflation and headline inflation, and we’ve also seen inflation rising in the Euro area.

“So we’re confident but not complacent about our progress in the fight against inflation.”

In fact, Chalmers anticipates inflation returning to the RBA’s target range even ahead of the RBA’s own forecasts. Namely, in the budget, the government projected inflation to return to the Reserve Bank’s target band by the end of financial year 2024–25 at the latest, earlier than both economists’ and the RBA’s expectations.

At the time, the Treasurer said cost-of-living policies had been designed to take some 0.75 of a percentage point off inflation this year, and a further 0.5 of a percentage point next year.

“The Treasury does expect an earlier return to the inflation target band because of the way that we’ve designed our cost-of-living policies,” the Treasurer said on Monday.

“Now our strategy here is to provide substantial, meaningful, and responsible cost-of-living relief at the same time as we fight inflation and get the budget in better nick without smashing the economy.”

The consumer price index (CPI) rose 4.0 per cent in the 12 months to May 2024, up from 3.6 per cent in April. On the back of the stronger-than-expected data, most economists now entertain the prospect of further rate hikes.

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.