Treasurer Jim Chalmers Urged to Deliver Contractionary Budget Amid High Inflation

Analysts have warned Treasurer Jim Chalmers to deliver a contractionary or neutral federal budget in May 2023 due to stubbornly high inflation in Australia. Inflation accelerated to 1% in the first three months of 2024, higher than expected, reinforcing the view that interest rates will stay higher for longer.

Of 20 leading economists surveyed, 9 called for a contractionary or slightly contractionary budget, 8 called for a neutral stance, and 2 fell somewhere in between. The treasurer said plans to pour billions into green manufacturing would largely come in later years, but the quality and timing of spending matter.

The data indicates that domestically sourced price pressures remain unrelenting, challenging the Reserve Bank of Australia's efforts to bring down inflation. Everyday household purchases saw significant year-over-year price increases between December 2023 and March 2024.

Why this matters: The high inflation poses a challenge for the RBA in bringing inflation back to its 2-3% target range by the end of next year. The upcoming federal budget will be closely watched to see if it adds to demand and further fuels inflation, which the RBA is trying to bring under control.

The RBA had previously abandoned its tightening bias, but the latest inflation data suggests this was premature. Investors are being advised to accept that rate cuts are unlikely to come anytime soon. Chalmers has warned of a precarious global outlook, citing slower growth forecasts for major economies.

The fresh inflation data showed significant increases in insurance premiums, rental prices, education costs, and medical services. The RBA is expected to hold the cash rate steady at its next meeting on May 7.

Independent economist Chris Richardson warns that the growth figure will be downgraded in the budget and criticizes the government's interventionist industry policy, particularly the focus on areas like solar panels, which he says is a waste of money. Richardson suggests that the government cannot afford to have an over-generous budget that adds to inflation and further delays a pre-election reduction in interest rates.

Key Takeaways

• Analysts urge Treasurer Chalmers to deliver a contractionary or neutral 2023 budget
• Inflation accelerated to 1% in Q1 2024, higher than expected, challenging RBA's efforts
• Domestic price pressures remain unrelenting, with significant increases in household costs
• RBA likely to hold cash rate steady, as rate cuts are unlikely in the near future
• Economist warns government cannot afford an over-generous budget that fuels inflation