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Jim Chalmers’ Budget face saver for the RBA on inflation – voters too

by Michael Pascoe | May 12, 2024 | Economy & Markets, Latest Posts

Inflation and cost of living are critical for Treasurer Jim Chalmers when he hands down the Federal Budget on Tuesday. But Michael Pascoe says he can kill two birds with one stone. 

If you had Jim Chalmers’ job on Tuesday night and could wave a magic wand that would bring the Reserve Bank’s inflation forecast for the new financial year down into its target band of 2 to 3 per cent, would you wave it? 

Too bloody right you would. The RBA board at its June meeting, with a forecast of 2.9 per cent consumer price inflation for the year, would have to be thinking about timing interest rate cuts, not increases. 

Short of ASIO naming shadow cabinet as a nest of Russian spies, interest rate cuts before next May’s election are at the top of the Labor’s political wish list. It’s a prerequisite for avoiding minority government – or worse.

The magic wand was mentioned twice by RBA econocrats during last Tuesday’s media lockup for the bank’s quarterly statement on monetary policy (SMP). It was explained that the SMP forecasts – what the board bases its interest rate decisions on – were made on the basis that the government’s energy rebates end on June 30, as presently legislated. 

Getting CPI down to RBA target zone

But if the rebates were renewed, hey presto, 0.3 would be knocked off the inflation guesses. 

Tuesday’s SMP forecast of 3.2 per cent CPI for the new financial year would become 2.9 per cent. The 3.1 per cent forecast of the bank’s “trimmed mean” inflation would be 2.8 per cent. 

The RBA would be back in its target zone, delivering what it is charged with delivering, honour restored, and Anthony Albanese could claim his government was delivering cost of living relief, contributing to taming the inflation dragon. 

Which is why extending the rebates should be a no-brainer on Tuesday night. Otherwise, you would question the Treasurer’s brain. 

Energy relief no-brainer

As magic wands go, the Energy Relief Fund was cheap, costing the Federal Government $1.5 billion with the states and territories matching that. 

Originally billed as “targeted and temporary” relief for eligible families and small businesses, renewing the rebates for another year would still be temporary and certainly targeted – there’s an election.

The foreshadowed extra billions for social housing on Tuesday won’t be felt by the electorate for years, if at all. Energy rebates are immediate, their existence no doubt underlined by an advertising blitz at taxpayers’ expense. 

Engineering a lower CPI to take some pressure off interest rates also has quicker (i.e. pre-election) impact and necessary impact at that: despite keeping the RBA keeping its cash rate steady since November, monetary policy is still tightening, the last two hikes still working their way through the system. 

Without touching the cash rate, the RBA expects the percentage of total household disposable income being taken by scheduled mortgage repayments to rise from the present 10 per cent to 10.5 per cent by the end of the year – and that’s the percentage of household income increased by the Stage 3 tax cuts. 

The still-tightening monetary screws, miserable consumer spending, the Tax Office calling in debts it had let run during the pandemic, and businesses using up the Treasury COVID largesse that had propped up balance sheets all promise rising business failures and bankruptcies this year – part of how the unemployment rate is supposed to rise to the 4.3 per cent the RBA wants. (https://www.thenewdaily.com.au/finance/2024/05/08/michael-pascoe-rba-inflation-employment )

In such an election year climate, renewing the energy rebates looks like the least Treasurer Chalmers might do. It would be a worry if he doesn’t use that wand.

Federal budget targets housing crisis amid backlash

Michael is a journalist, commentator, speaker and contributing editor for The New Daily.

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