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Pressure On Budget To Support Growth & Hold Back Inflation

AUSTRALIA

The federal budget is announced on May 14 at around 1930 AEST. RBA Governor Bullock said this week that Treasurer Chalmers has reassured her that inflation is at the front of his mind. There seems to be a lot of pressure to increase spending and stimulate growth and thus uncertainty over whether there will be restraint in the near term in order not to fuel inflation. The next election is due by May 2025, which is also likely to influence decisions. The RBA is “vigilant” to upside inflation risks, including the budget.

  • Another surplus may be predicted due to favourable conditions for commodities but the budget is also likely to show an overspend but also stronger revenue from income and company taxes. Deficits though are expected to rise across the rest of the forecast horizon.
  • Judo Bank’s chief economist has estimated that new spending of $5-10bn would not pressure rates, but over $10bn or 0.5% of GDP could be inflationary. The July 1 tax cuts are estimated to be equivalent to 3 rate cuts.
  • Treasury’s inflation forecast was around 0.75pp lower than the RBA’s in its MYEFO at end-2023. With the RBA revising up its CPI forecasts this month back towards its November projections, although Q4 2024 is now 0.5pp higher, the government’s expectations will be watched closely to see if they are revised in tandem.
  • Some information has been announced including stage 3 tax cuts (FY25 $23bn), projects for western Sydney ($1.9bn), domestic violence support ($925mn), Future Made in Australia ($1bn), HECS relief ($3bn) plus green hydrogen support. More details will probably be released over the coming days.

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