Treasurer Jim Chalmers has to walk a fine line between providing cost-of-living relief and arresting stubborn inflation, all the while ensuring economic growth as he hands down the Australian Federal Budget for the 2024-25 financial year on Tuesday night.
And those are on top of ensuring voters are happy ahead of the Albanese Government’s re-election bid.
Dr Chalmers is expected to deliver a budget that “will have a nearer-term focus on inflation but a longer-term focus on sustainable growth”, as he’s said on more than one occasion.
The Reserve Bank of Australia is expected to watch the budget closely to determine whether it will impact its forecast for inflation to land between 2% and 3%, which in turn will lay the foundation for the cash rate cuts.
The latest ABS consumer price index (CPI) revealed annualised inflation is still above RBA’s target band, coming in hot at 3.6%.
This only means the government cannot afford to let fiscal (ill)discipline further add inflationary pressures especially since $23 billion of tax cuts are already locked and loaded and additional spending for housing has been announced.
However, the RBA is optimistic things will fall into place with respect to budget and inflation.
“Treasurer Jim Chalmers says publicly and to me in private that he does have inflation in his mind while he is thinking about the budget,” RBA Governor Michele Bullock earlier said.
“I think they are all conscious that they want to help us beat inflation so they don’t want to try to add to inflationary pressures,” she added.
It appears likely given that recent remarks by the Treasurer suggest the Government’s inflation forecast will fall within target more quickly than the RBA anticipates – by December 2025.
Targeted cost of living relief
To achieve that balance, Westpac senior economist Pat Bustamante expects the relief in the Federal Budget would focus on targeted cost of living support.
“Support for the more vulnerable, industry support, investment incentives, and investing in the care sector will all be big budget items,” Mr Bustamante said.
These policy changes are expected to come with a price tag of around $21 billion over the five years to 2027-28 financial year.
“In addition, the government is expected to provide industry support in the form of balance sheet transactions (that is, equity injections and concessional loans) amounting to around $6 billion over the same period,” he added.
While Westpac economists estimate a deficit of $10.1 billion in 2024-25, NAB Group chief economist Alan Oster doesn’t think the government will be lavish in its spending – although several measures are expected to bolster the economy.
Support for Aussie individuals and families
The changes to the Stage 3 tax cuts, which will come into effect on 1 July, are the highlight of the Albanese Government’s cost of living relief.
Under the new amendments, an Australian resident earning $45,000 a year will realise an additional $804 in tax savings.
On the other hand, those with annual take-home pay above $150,000 will see a smaller cut than they otherwise would have after the government abandoned plans to abolish the 37% tax bracket.
The reworked form is intended to benefit low- to middle-income earners.
Other measures already announced was the inclusion of superannuation payments in the 20-week, government-funded parental leave from 1 July 2025 – provided that the Albanese Government is re-elected.
It will come with a price tag of $1.1 billion over four years.
The government also announced the proposal to cap the HELP indexation rate to either the lower consumer price index (CPI) or the wage price index (WPI), backdated to 1 June 2023.
Aussies studying to be teachers, nurses, midwives, or social workers will also be offered $320 a week for mandatory workplace placements.
Substantial investments in remote housing as part of the Closing the Gap initiative and the new $925 million package to help victims of domestic violence are also expected to be delivered.
“A boost to childcare workers’ wages is almost certain to go ahead as well,” Mr Oster said.
The economist also anticipates the budget will provide rental subsidies.
Support for small businesses
“Chalmers may have ruled out lowering the company tax rate, but there is the very real possibility of a business investment allowance,” Mr Oster said.
He believes that the current instant asset write-off scheme would finally be permanent.
NAB also expects the return of the Small Business Energy Incentive, which provides small businesses with a tax deduction of up to $20,000 if they invest in energy-efficient equipment.
The budget is expected to once again deliver the energy price relief scheme that gives eligible small businesses up to $650 off their energy bill after Prime Minister Anthony Albanese hinted at a recent address.
“Our government understands that for small business, as for Australian families, energy bills remain a source of financial pressure,” he said.
Mr Oster believes these measures only amount to short-term solutions and thus unlikely to fuel inflation.
In fact, he argues the recent “blip” in inflation figures was “small and likely to be temporary”.
“For the sustainable growth Chalmers is touting – what he’s described as ‘protein, not carbs’ – we need to look at the Government’s Future Made in Australia Act,” he said.
“It aims to encourage investment in local manufacturing through a series of investment incentives, including tax breaks, loans, subsidies and the cutting of red tape.”
Photo by Towfiqu Barbhuiya on Unsplash
