Even if Budget 2024–25 is unhelpful in helping the Reserve Bank return inflation to target, it's likely effect could be minimal.
In my budget night response to Budget 2024–25, I described Treasurer Jim Chalmers as a juggler working to keep multiple balls aloft. There was a ball representing past pledges on fiscal repair and debt stabilisation; one for inflation; one for the economic, social and political imperatives of the cost-of-living squeeze; another for Australia’s lacklustre productivity growth; and a shiny new ball for the government’s embrace of industrial policy. However, for many commentators, this missed the point. For them, Budget 2024–25 had just one job — to assist the Reserve Bank of Australia (RBA) with disinflation. According to many of them, it failed to deliver.
One response to this argument would be to dismiss it as naïve. It was always unrealistic to assume the Treasurer would dismiss all but one of the competing priorities for the budget’s attention.
Another would be to query the diagnosis. Just one week before the budget, the RBA itself had stressed that the economic outlook remained “highly uncertain”. Staff forecasts said risks to the domestic outlook were “broadly balanced” such that the central bank was “not ruling anything in or out”. Granted, Martin Place did make it clear that “returning inflation to target... remains the board’s highest priority”. But it was also clear that the risks facing the economy were two-sided. Hardly a slam- dunk case against taking out some fiscal insurance against recession risk.
Still, what if we set those counter arguments aside and judge Budget 2024–25 solely on its impact on inflation? The starting point would be the RBA’s judgement that the level of demand in the economy still exceeds supply. Adding to that demand without also boosting supply — and the latter is very difficult to do in the short run — would make the RBA’s life harder. So, let’s start with the fiscal bottom line.
First, the positive. Not only did the Treasurer announce the first back-to-back surpluses in 16 years, but as the Secretary to the Treasury later emphasised in a post-budget address, Australia’s budget consolidation to 2023–24 involved the fastest and largest fiscal tightening on record, with the Commonwealth budget balance as a share of GDP improving by around seven percentage points from its pandemic trough. That performance also looks decent by international standards, with fiscal repair outpacing many other advanced economies. According to internationally comparable IMF data, Australia’s budget balance to GDP ratio has improved by more than five percentage points since 2021, compared to just 1.5 percentage points for the average advanced economy.
Next, the negative. Budget 2024–25 says the underlying cash balance will swing from a surplus of $9.3b (0.3 per cent of GDP) in 2023–24 to a deficit of $28.3b (one per cent of GDP) in 2024–25. That’s a difference of $37.6b (1.3 per cent of GDP). If we consider the structural budget balance to remove the effects of temporary cyclical factors, the fiscal position deteriorates by an estimated 0.7 percentage points of GDP. That is, starting this financial year, fiscal policy is expected to loosen, which will add to demand, which will complicate life for the RBA. There are two qualifications to this judgement and one complication.
First, there is some chance that the budget outcome in 2024–25 will be better than forecast, as has been the case for the past two years. Treasury has continued to use very conservative forecasts for commodity prices and Australia’s terms of trade.
Second, the already-legislated stage 3 tax cuts were previously estimated to worsen the budget bottom line by $23.3b in 2024–25, and by more than $105.7b over the forward estimates. The government’s changes earlier this year kept the reworked tax cuts broadly within the original fiscal parameters. Already in the bottom line, they didn’t meaningfully add to the inflationary outlook.
While additional demand is being added to the economy, it’s not huge — less than half of one per cent of GDP and less than one per cent of household consumption. The nature of some of this new spending then adds a further complication. Cost-of-living relief will give households more disposable income to direct towards spending elsewhere, but again, the magnitudes are modest. The complication is that while it will add to demand, this offset, by being quite small and reducing headline inflation, will have some positive second-round effects. The charge that Budget 2024–25 is, on balance, unhelpful for the RBA’s aim to return inflation to target is probably fair, but the likely size of that effect looks fairly small.
AICD chief economist Mark Thirlwell GAICD has focused on the international political economy at the Bank of England, JPMorgan, Austrade and Export Finance Australia.
This article first appeared under the headline 'Juggling Act’ in the July 2024 issue of Company Director magazine.
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