The Albanese Government’s best-in-show surprising bulging budget surplus has been criticised as being too big and not helping reduce inflation and interest rates. However, the Government might have a bigger inflation-creating problem called immigration!

A survey of 3,000 people by CT Group found only 13% of Australians think the PM is doing enough to deal with the cost-of-living problem. This comes at a time when The Australian accuses Treasurer Jim Chalmers of protecting his ballooning budget surplus at the expense of providing relief from record high inflation.

Dr Jim is gambling that the benefits of a budget surplus to pay down the Government’s debt from the pandemic policies is more valuable than say cutting the fuel levy to lower the price of petrol at the bowser for consumers. This would also help lower inflation and possibly stop two more rate rises from happening.

Last financial year’s surplus has been a surprise and looks like coming in at a bigger-than-expected $20 billion.

Measures like cuts in the fuel levy would be a broad policy decision to help nearly all Australian households and bring down the headline inflation rate, but the OECD (the Paris-based economic thinktank) says budget help measures from the Treasurer should be more targeted at “vulnerable households” in trouble because of inflation and big rate rises. The OECD group looked at Australia’s budget measures and concluded that not enough was done to target support “to the most affected households and businesses.”

In a speech to the Brotherhood of St Laurence in Melbourne, the Treasurer basically sees his big budget surplus as a help to bring down inflation. Why? Well, if the Government takes more from the economy than it gives, then it reduces demand, consumer and business spending as well as job creation, which should bring down inflation. It’s why economics is called a dismal science.

No Treasurer will say this but a ballooning budget surplus puts the squeeze on the economy. In concert with the aggressive rise in interest rates from the RBA, it will eventually beat down inflation, while killing jobs along with business and consumer confidence.

The trick is to do this without forcing the economy into a recession, which now AMP’s Shane Oliver says has become a 50:50 proposition. “As a result of ongoing rate hikes, we see the risk of recession in the next year as very high at about 50% with consumer spending almost certain to start going backwards later this year as the 4% plus cash rate will push debt interest payments to around record levels as a share of household income,” he explained.

He believes as fixed rate borrowers roll off to variable rates, and past variable rate hikes flow through to the others with home loans, the threat of a recession will escalate.

This has been my strongest argument against the RBA’s latest rate rises because I think Dr Phil Lowe and his board are underestimating the biggest mortgage cliff ever. Usually only 15% of borrowers hit the cliff and see their repayments spike from low fixed rates to high variable rates, but this time it will be 40% of borrowers.

I put this to Michael Knox, the chief economist of stockbroking firm Morgans, on my Monday TV show and he surprised me with his answer.

He said ordinarily he would agree that this big mortgage cliff would create a recession and kill inflation, but the surge in immigration is and will keep demand for accommodation and consumer goods and services high. In turn, this will keep inflation higher than it would if immigration was low!

In 2022-23 the net migration number was tipped to be a huge 400,000 coming from the return of overseas students, skilled temporary workers and those on working holidays. A big part of it is a catch up from the exodus that the pandemic created but it does add to inflation and therefore puts pressure on our interest rate problem.

So not only do Anthony Albanese and Dr Jim have to cope with accusations that the Budget Surplus isn’t helping lower say the price of petrol, their immigration program will keep inflation and interest rates high!

On the flipside, one might argue that the immigrants’ demand could save us from a recession, but it will mean interest rates will remain higher for longer.

Did I say economics is a dismal science?

You can see that interview here: https://switzer.com.au/the-experts/peter-switzer/time-to-buy-oil-stocks-and-banks-plus-3-stocks-to-buy/