21 May 2024
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Dark side of the Budget moon

Peter Switzer
16 May 2024

The good side of the 2023/24 Budget was simple. Treasurer Jim Chalmers gives lots of Australians money to soften the rise in inflation and interest rates, he tweaks energy and rental slugs, inflation falls by Cup Day and rate cuts happen. It’s a magic pudding or as I called it a “Trust me” Budget. But Peter Dutton will undoubtedly call it out as a phony magic pudding tonight with his Budget Reply speech, underlining the bad side to Labor’s fiscal figuring.

While media responses were pretty positive about the Budget, The Australian’s Patrick Commins has collected the potential dark side of Jim Chalmers ‘moon’. This is less charming reading. But wait, there’s one other story not being pushed that could help the Treasurer pull off his positive push on inflation and therefore interest rates.

Before that, I’ll list those negatives below:

  1. Even Treasury says the benefits of stage three tax cuts will vanish for workers in just four years.
  2. It adds inflationary pressure, despite some price cut positives for say energy bills.
  3. No big wins for productivity.
  4. The structural deficit — the deficit created by big spending — increases.
  5. The Greens and the Coalition oppose aspects of key planks of the Future Made in Australia agenda.

The big problem for workers is that bracket creep shows “…workers would provide 49 per cent of government receipts by 2027-28”.

This is how Commins summed it up: “This is higher than before the Coalition’s tax reform package began in 2018-19 and higher than the 48 per cent predicted for this ­financial year before the July 1 start date for the stage three tax cuts – due to bracket creep. It is also well up on the 42 per cent share in 2008.”

Economists are thinking the same as RBC Capital chief economist Su-Lin Ong, who said “with more money going into the economy than before, it’s hard to see how it makes their [the RBA’s] already challenging job any easier”.

Also, big spending on infrastructure is no help to inflation, unless it delivers productivity gains quickly. Against that, the spending could be slower than how the Treasurer portrayed it on Budget night.

Peter Dutton even thinks Labor was too generous to miners who are set to pocket $13.7 billion in budget tax credits aimed at boosting downstream processing of critical minerals. However, these gains don’t kick in for miners until 2027.

Personally, I think the Budget needs to be looked at in a short-term way because right now we need inflation down so interest rates can be cut to help the economy avoid a recession and to help the stock market rise, which should imply more profitable companies, higher share prices and better performing super.

However, for Dr Jim to look like he knew more than the doubting economists, two important things have to happen. First, immigration has to be cut and the Budget did predict this. Over the last and this financial year, net migration has gone from 528,000 to 395,000 and is tipped to be 260,00 for 2024-25.

Second, the economic readings between now and November need to show that Treasury knows more about our economy than the RBA and economists quoted in the media. You see, if our economy is slowing faster than what’s currently forecasted by the consensus of economists, then inflation falls faster and we might need a rate cut by Cup Day in November.

However, if economic statistics keep saying inflation isn’t falling, we might see the Government go for an early election but that would be like the PM is trying to avoid a no cut or even a rising interest rates future. On the other hand, if rate cuts come in November and say December, we could see an early election to avoid us seeing unemployment going too high.

Interestingly, The Australian pointed out that Mr Albanese refused on Wednesday to rule out an early election, which “prompted new speculation that he could go to the polls this year”.

Overnight, US stocks were up as inflation came in less than economists were predicting, showing the number crunchers can guess wrong. Our Treasurer and Peter Dutton will hang off every economic release over the next five months, along with the interest rate sufferers who are praying rate cuts come fast!

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