Oops, there’s been a budget deficit blowout around $60 billion! This story contrasts with the double surpluses totalling $37.9 billion that Dr Jim has understandably crowed about. Apart from the question about how this happened, the bigger question for a government set to face voters in May (at the latest) is this: did the Treasurer’s bad budgeting hurt inflation and rate cut hopes?
This Wednesday we see the September quarter National Accounts and a 0.4% rise in economic growth is predicted. The annual growth rate is tipped to be 1.1% and you can thank the Treasurer’s budget blowout for a lot of that. On the flipside, it has made the RBA’s job of getting core inflation into the 2-3% band a lot harder.
In turn, this has delayed our first rate cut, once expected by mid-2024, then September, and then December or February. Now economists are tipping May. Why has this happened?
In simple terms, our economy is too strong. The job market is tight, so unemployment hasn’t budged from around 4.1% because economic growth, powered by the budget blowout, has kept us away from a recession.
Across the ditch, the NZ central bank took the cash rate over 5%, while we stayed at 4.35%. The Kiwi government hasn’t played an offsetting role, so there’s been two half-a-percent rate cuts in the past two months.
The Kiwis will see their budget deficit blowout because they’re probably in recession with a 0.2% contraction of growth in the three months to June 2024. Their next number is bound to be negative with the RBNZ having cut the cash rate by 1% over the past two months!
The Albanese Government has saved us from recession, but it has also stopped us getting rate cuts. The US has avoided a recession and had two rate cuts, but they did take their equivalent cash rate above 5% and that helped them get inflation close to the 2% target that the Federal Reserve set.
Back here, former Treasury economist Chris Richardson has looked at Dr Chalmers efforts. Here are his main conclusions:
1. Jim Chalmers has added $104 billion in spending while raising taxes by $44 billion.
2. The surpluses wasn’t great budgeting but a consequence of war, migration and inflation factors.
3. Spending is at Covid level highs.
4. Cash headline deficits between now and 2028 will be $220 billion.
This is the Richardson view: “Our budgetary luck is running out – instead of write-ups, the budget is now edging into write-down territory. That’s because iron ore prices are down, inflation is down too, and migration is slowly slowing, while the hollow log provided by past Treasury conservatism is a lot less hollow than it used to be”.
He thinks the Government has blown an opportunity to really improve the country’s budget position for the future by over-spending.
The AFR’s Michael Read has reported on what’s likely to show up in the National Accounts that will add to this view of excessive spending. “Westpac expects the National Accounts will show that government spending hit a record 27.7 per cent of GDP in September, up from 27.3 per cent in June, fuelled by infrastructure spending and state and federal government cost-of-living subsidies, including for electricity bills,” he revealed.
Meanwhile, forecasts of GDP per capita, which is an indicator of living standards, fell for a seventh straight quarter in September due to continued strong population growth. This is another area that has produced economic growth and effectively has kept demand high for goods and services, which in turn kept inflation high.
I could trot out a pile of facts, figures and other exaggerations but the unquestionably true story is that the Albanese Government has spent to avoid a recession and a big spike in unemployment, but it has slowed down the fight against inflation. If we don’t see a rate cut in February and we have to wait until May, then Treasurer Chalmers will be to blame.
By the way, one of the best economists in Australia, Morgan’s Michael Knox told me on my Switzer Investing TV that we might have to wait until September for the first cut!
Here’s that episode — watch it at your peril: https://www.youtube.com/watch?v=_ym69iMezko