Today’s budget is a very political statement in that it contains a range of overt measures and targets aligned with the political philosophy of the Albanese Government.

The key theme permeating through the Budget is that increased government involvement in the economy will result in better outcomes for society; and it’s not just the poorest in society who need more support from government – funded through both the redistribution of income from the wealthy and the application of public sector debt.

A second theme is the significant expenditure targeted at the business sector to support the Made in Australia program, and provide energy cost relief, and investment.

The budget contains a whole raft of measures that fit neatly into these two themes, including:

  • tax relief for everyone, but additional tax relief for low-and-middle income earners who arguably already received their tax cuts in the earlier Stages 1 and 2;
  • every household to receive cost of living support in the form of energy bill relief via a $300 rebate; and an additional 10 percent increase in Commonwealth Rental Assistance for nearly 1 million households renting.
  • the introduction of the nearly $23 billion Future Made in Australia program aimed at encouraging domestic private sector investment in the transformation required for the country to achieve net zero emissions.

But it all leaves Australia facing long-term structural deficits.

The Treasurer has been at pains to explain that the ABS has confirmed that cutting energy bills directly cuts inflation too. This is technically correct; the rebate is provided to energy companies to reduce the revenue they need to recover from customers, and therefore energy bills are lower than they otherwise would be.

But the production costs associated with supplying energy are unchanged; it is just that the price paid by customers through their energy bill is lower because of the rebate. As soon as the rebate is withdrawn the prices paid by households will rebound (assuming there has been no change in the production cost of electricity), and inflation will kick up again. Now you see inflation, now you don’t.

Today’s surplus is going to be the last for quite a while – there is nothing in the budget about either revenue or expenditure reforms. Assuming the government has not decided that long term structural budget deficits are no longer a problem (which goes against economic fundamentals), then the can is being kicked into its next term or beyond, with a hope that productivity might re-emerge and help solve part of the problem.

The Treasury forecasts suggest the Australian economy will remain weak over the forecast period and only start to return to rates of economic growth similar to long term averages in 2027-28. The current weakness in the domestic economy is largely due to flat household consumption and falling dwelling investment, offset to some extent by strong public sector spending and solid private sector investment activity (although this is expected to weaken in the next few years). Net exports add positively to economic growth during 2023-24, although with the usual assumptions that the spot price of iron ore and metallurgical coal reverting to a long term price target significantly below current levels. Net exports are expected to detract from economic growth by 2025-26.

The labour market is forecast to weaken slightly over the forecast period with the unemployment rate pushing up to 4 percent by June 2024 and then stabilise at 4.5 percent for the following two years. This stabilisation in the labour market pushes down expected wages growth to low-to-mid 3 percent range over the forecast period. While weaker than nominal wages growth currently being achieved the concurrent fall in inflation means real wages growth strengthens from around 0.5 percent in the early years to 1.0 percent in the outer years.

The inflation forecasts contained within this year’s budget show a pathway to a return to the target band that is significantly different to the most recent forecasts presented by the RBA in their May 2024 Edition of the Statement of Monetary Policy. The Government is suggesting that the Energy Price Relief Plan and the extension of the Commonwealth Rental Assistance payments will together directly reduce headline inflation by 0.50 percent in 2024-25. Further, the strong fall in inflation over the coming year is also due to the continued reduction in services inflation which has lagged the decline in goods inflation. We suspect inflation might end up being somewhere between the RBA and Treasury forecasts.