The Budget and the economy

In his first Federal Budget, Treasurer Chalmers presented Labor’s policy agenda and fiscal projections – against a challenging global backdrop of rising inflation, rising interest rates and lower economic growth.

With inflation proving more difficult to curb, both here and globally, the trick for the Treasurer is in striking the balance between spending on government initiatives, without adding to inflationary pressures. Key government initiatives include childcare, aged care, health, more funding for TAFE, affordable housing and cleaner energy.

The good news is that from a pure bottom-line perspective, the budget is in a much better starting point now than in March this year when the Coalition delivered their last Budget. This is thanks to high commodity prices and a strong jobs market, meaning government revenues were better than earlier expected. As a result, underlying deficits over the next 4 years are around $42 billion smaller than last projections, with the government “banking” the revenue improvements over the next 2 years.

In the lead up the Budget, Treasurer Chalmers described his first Budget as a “bread and butter” affair, with a focus on responsible and affordable policies. The budget delivered on these themes with cost-of-living relief focussed on families, through childcare and paid parental leave. A Housing Accord with state and territory governments promised $350 million over 5 years to fund 10,000 additional affordable homes, and the extension of Paid Parental Leave to 26 weeks was a nod to gender equity and workforce participation.

On the savings side, the government is planning to reduce its spending on external labour, advertising, travel and legal expenses.

Economically, the key forecasts present a more challenging picture than the prior budget in March, with inflation and unemployment both expected to be higher, and real growth lower over the forecast period. High inflation is central to the current economic outlook, and even though wages are forecast to be growing faster, they are still unlikely to outpace inflation in the near-term. 

Global outlook

The global economic outlook has soured in recent months, and risks are tilted firmly to the downside because of global geopolitical tensions, as well tighter monetary policy (central banks lifting interest rates). 

There are obvious negative impacts on growth stemming from the war in Ukraine, China’s zero COVID policy (resulting in ongoing lockdowns) and the recent chaos in UK politics and economic policy. However, the overarching obstacle is undoubtedly stubbornly high inflation - resulting in aggressive interest rate rises from major central banks aiming to dampen demand. 

The rapid rise in interest rates has been the dominant market driver this year and we know that as interest rates continue to rise, economic growth will continue to be impacted in the period to come. Central banks have been surprised by the strength and breadth of the current inflation pulse and super-sized interest rate hikes have been common. We’ve seen several central banks raise by 0.5%, 0.75% or even 1% at a time.

Looking forward, the bottom line is that the inflation outlook is key, and even though unemployment rates are at or near record lows in many countries, consumer confidence is also very low, as the COVID re-opening boost fades and high inflation bites. 

Australia

Australia has experienced a similar rise in inflation and interest rates, although so far economic activity has proved resilient, with reasonable underlying momentum despite worsening economic challenges globally. 

Australia has benefited from trade and the lift in commodity prices, but the key to our resilience has been the very strong labour market. Unemployment is near generational lows and there are some promising signs that wages are lifting. Large savings accumulated during lockdowns and low unemployment has supported household spending, despite weakening consumer sentiment and falling house prices.

As in many countries around the world, high inflation remains a key challenge, and we have seen RBA raise rates aggressively to try and slow demand and contain inflation. However, the RBA’s last meeting saw an important change, as they surprised markets and became the first major central bank to scale back the size of their hikes and return to a “business as usual” 0.25% move rather than the 0.5% they had raised rates in recent meetings.