Treasurer Jim Chalmers has scraped together a budget surplus for one year thanks to raging commodity prices, but the prospect of an economic downturn makes the prognosis for households bleak. Callum Foote emerges from the budget lockup.
Jim Chalmers, rising above the Coalition’s puffery of ‘Back in Black’, proudly announced a budget surplus of $4.2bn, or 0.2% of GDP, the first surplus in fifteen years. Chalmers, like all notable Australian treasurers, was helped by sky-high commodity prices. Who knows when they will drop.
It is hard to be pleased with this budget’s results however. There are many hidden pitfalls and much of what there is to celebrate may just be from beating the goalposts which the Treasurer set for himself last October.
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Real wages, household pressure
Despite the Chalmers’ assurances that real wage growth is on the mend, he has cherry-picked the only year in the forward estimates with good news.
The Treasurer is right to say that “lower than expected inflation and higher wages, mean an earlier and stronger return to real wages growth is forecast for 2023–24”. What he didn’t say was that 2023-24 is the only year where real wages were higher than predicted.
Real wages were only expected to increase by 0.24% in 2023-24, they are now forecasted for a 0.72% increase.
Last year, real wages are estimated to have dropped worse than expected, being down by 2.1% rather than the predicted 1.9%. This is due to inflation being 0.25% higher over the year than was forecasted in October.
In all other forward estimates real wage growth is now forecasted to raise slower than expected.
Forecasted real wage growth for 2024-25 is down from 0.73% last October to 0.48% in tonight’s budget, and in 2025-24 it falls from a 1% rise to just 0.73%.
Following that, real wages are expected to pick up, growing at 0.97% in 2026, the last year forecasted.
While the government is not sitting idly around waiting for wages to pick up, and while the complement of growth projects from October are still in play, the new measures leave something to be desired.
The first and primary wage growth measure is supporting the Fair Work Commission’s decision to enact a 15% pay rise for the roughly 250,000 aged care workers in the country, costing $11.3 billion over five years.
The other is the expansion in eligibility for the Single Parenting Payment to include children up to 14 years of age, costing $1.9 billion over 5 years. The measure “will make it easier for parents and carers, particularly women, to participate in the workforce and will mean more children can access the benefits of early education” according to the budget.
Labour market weakening
Prospects for the labour market are relatively grim.
Employment growth will grind to a halt, from 3.6% last year to just 1% for 2023 and 2024.
This is a quarter of a percentage higher than expected.
Unemployment will rise from the 50-year low of 3.5% to 4.25% in 2024, with further forward estimates unavailable. Employment growth will also slow, from 3.6% last year to 1% in 2023 and 2024.
These drops coincide with an increase in migration. Net overseas migration will hit a peak of 400,000 new migrants forecasted for this year before slowing down to 260,000 per year out to 2026.
The forecasted rise in unemployment is likely driven by both a slack economy, battered by interest rate rises, which is struggling to grow enough to sustain existing employment, as well as the new increase in migrants.
Inflation bogey
The Treasury believes the worst of inflation is behind us, with the world coming to grips with the invasion of Ukraine and putting Covid in the rear-view mirror. While remaining steady, inflation has still been forecasted as being a quarter of a percent higher than October’s budget in two of the four years modelled (2022-23, and 2024-25), while remaining the same in others and dropping by a quarter this year.
The government’s primary inflation reduction strategy is its Energy Price Relief Plan which is expected to further reduce inflation in 2023–24 by around three quarters of a percent. “This should see inflation return to the RBA’s target band in 2024–25, although cost-of-living pressures will remain a near term weight on households,” the budget reads.
The introduction of this one-time-only measure makes 2023 the only year to see a drop in forecasted inflation.
The Energy Price Relief Plan will provide a one-off payment of $500 to ‘eligible’ households and small businesses, going towards their energy bill only.
Retail electricity price increases in 2023–24 is now expected to be around 25% lower, and retail gas price increases around 16%, lower than expected prior to the Government’s interventions.
Previously, the treasury had estimated that retail electricity prices would rise by an average of 20% by the end of last year, and a further 30% in 2023-24.
Households will still see an estimated 22.5% increase in energy prices, even with the extra $500.
Why pay off energy bills to combat inflation?
While doubling as a cost-of-living relief measure, the reason why the Energy Price Relief Plan is a targeted inflation measure, is due to how the Consumer Price Index, our metric for inflation, is calculated.
In the March quarter this year, electricity recorded an annual rise of 15.5%, the largest annual rise since 2013. The rise in electricity prices this quarter was due to increases in Brisbane, Hobart and Perth following the unwinding of the Queensland Government’s $175 cost of living rebate, the Tasmanian Government’s $119 winter bill buster, and the Western Australian Government’s $400 household electricity credit in 2022.
Payments made by the Federal government to energy companies on behalf of households will plug this gap.
Expenditure on energy by households and businesses is used in the calculation of the rate of inflation.
By keeping household energy expenses lower, the rate of inflation will be calculated lower.
It also has the handy ability of itself not contributing to inflation. If the treasurer just handed over to every struggling household the $500 he intends to give to their electricity providers, any additional spending on consumer goods by those households would then contribute to inflation.
The Energy Price Relief Plan works the same way as interest rate rises. As mortgage holders are forced to hand over more money to their bank and cannot use those funds in the broader economy, inflation goes down.
GDP growth, a blue outlook
It’s not all sunshine and roses.
Forecasted to 2025, GDP is expected to slow from 2021’s 3.7%, to just 1.5% in 2023 before recovering slightly to 2.25% in 2025.
Despite the budget’s insistence that “Business investment is expected to support activity, underpinned by the strong pipeline of work and a need to add capacity to meet the level of demand,”
total business investment growth is forecasted to fall year-on-year from last year’s 6.1% to just 1.5% in 2025.
Growth in mining investment is expected to stop dead in its tracks from 8.4% last year to zero this year, recovering to 1.5% growth in 2025, while non-mining related investment will have a steadier decline from 5.4% last year to 2% in 2025.
How are households coping?
An economic slowdown has already hit Australian consumers and the housing sector worse than expected “slowing was expected in the October Budget, but has materialised slightly earlier than anticipated, with consumers and the housing sector most exposed” the budget reads.
According to analysis by the Centre for Future Work, household consumption has previously provided 80 percent of the growth since the trough of the recession in June 2020.
Unfortunately, the reliance on household spending for growth has come to an end.
Instead of the 4.1% growth in household consumption predicted for last year, consumption only grew by 3.7%. The predicted 6.5% growth for this year has been downgraded to 5.75% and dropping to 2.5% in 2024.
It will be a tough year for households, as the cumulative impact of cost-of-living pressures and higher interest rates will now constrain household budgets.
Recent data indicates household spending has slowed over the March quarter of 2023, and high interest rates (including the roll off of fixed-rate mortgages) will increasingly weigh on household budgets and spending over the year ahead. To maintain consumption in the face of these pressures, many households will be required to save less of their income. The Treasury expects to see household savings ratios fall below pre-pandemic levels.
Dwelling investment, the measure of the housing sector, has not just slowed but is expected to decrease in forward years hitting a trough of -3.5% in 2023, lower than the expected -2%.
Debt
Gross and net debt as a share of GDP are both expected to be lower each year over the forward estimates compared to the October Budget.
Gross debt is estimated to be $923 billion (35.8 per cent of GDP) on 30 June 2024, increasing to a peak of $1,067 billion (36.5 per cent of GDP) at 30 June 2027. This is 10.4 percentage points lower and 5 years earlier than estimated at the October Budget.
Net debt will continue to climb in the forward estimates, hitting $703 billion in 2026.
The government has banked 82% and 87% of the increase in revenues over the past two budgets, leading to the small budget surplus forecasted in 2022-23 and avoiding further inflation pressure.
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Callum Foote was a reporter for Michael West Media for four years.