Treasurer Jim Chalmers is adamant his second budget will not make Australia's inflation problem worse while providing cost of living relief — but economists are divided about whether that confidence is misplaced.
Some economists have even suggested the budget was a "missed opportunity" for the treasurer to do more to cut inflation and put an end to rate rises by the Reserve Bank, while one has warned it could prompt two potential rate hikes in the coming months.
The centrepiece of Tuesday night's budget was the $14.6 billion cost of living relief package aimed at helping households and small businesses make ends meet while inflation and interest rates remained high.
In its economic outlook, the budget noted that inflation had peaked, and was slowly coming down, sitting at 7 per cent in the March quarter, down from 7.8 per cent in the three months to December last year.
Mr Chalmers claimed responsible measures in the budget would not increase inflation, but would instead drive down the consumer price index by 0.75 per cent next year.
Treasury's current forecasts expect inflation will return to the Reserve Bank's target range of 2-3 per cent by 2025.
David Bassanese, chief economist at BetaShares, said the budget's forecast economic growth could give the RBA reason to lift interest rates "at least once".
"The second Labor budget under Treasurer Jim Chalmers is unambiguously expansionary, with a boost to GDP growth equivalent to around 1.5 per cent over the next two years," he said.
"This adds to the risk that the RBA will feel the need to raise interest rates at least once and possibly twice more in the coming months."
Mr Bassanese said the budget was a "smoke and mirrors" exercise that pulled focus on its $4.2 billion surplus, drawing attention away from subsequent years of deficits.
"The budget is admirable in that most of the extra budget bounty from a resilient economy and higher export commodity prices is being saved rather than spent … it's also hard to argue over the areas in which money has been spent — mainly helping the least well-off in the community," he said.
"However admirable is the provision of "cost of living" support to those less well-off, they also tend to have a higher propensity to spend extra income, which will add to the challenge of slowing consumer demand in the coming year."
"This is why it would have been beneficial to introduce other offsetting budget tightening measures at the same time."
He said budget measures designed to support the housing sector would also stimulate demand, encouraging renters and first-home buyers to compete for the limited number of houses available in capital cities.
"Although various measures have been introduced to lower CPI inflation (energy and rental rebates), the expected 3.25 per cent rate of CPI inflation over the year to June 2024 is more marginally (0.25 per cent) lower than those in the October budget and current RBA forecasts," he said.
"As for the future, the challenge of budget consolidation will only get harder, not easier, from here."
Not an 'inflationary budget'
Speaking to The Business on Tuesday night, senior Barrenjoey economist Johnathan McMenamin said the policy changes would reduce headline inflation as well as inflation expectations.
"Those will actively bring down inflation, but they will boost overall disposable income in the economy, and we think it can add marginally to inflation next year, but it's fairly immaterial," he said.
"What it does do as well is it brings down expectations for inflation, which we think is a really important aspect of this whole thing.
"It will reduce headline inflation. We definitely don't think it's disinflationary or deflationary. But we wouldn't say we characterise this as an inflationary budget."
Barrenjoey also said energy bill price relief, including coal and gas price caps, rental assistance increases, amendments to the PBS, and an increase to the tobacco excise, would negate inflationary spending and therefore not prompt the Reserve Bank to increase the cash rate.
"We would broadly agree with Treasury's assessment that this budget does not materially worsen the inflation problem but – importantly – these policies aren't generating disinflation or deflation, leaving the job of bringing inflation back within the 2-3 per cent target band largely with monetary policy," it said in a statement.
Barrenjoey chief economist Jo Masters told The Business the budget leaves the challenge of inflation directly in the hands of the RBA.
"When we run it through our modelling we get an inflationary lift, but it is not material enough to really alter the economic outlook or our views for the RBA," Ms Masters said.
"They are not making it worse but they are not helping and they are leaving the challenge to monetary policy."
Economist Lachlan Vass from e61 agreed that the budget is straddling neutral ground when it comes to Australia's high rate of inflation.
"[The budget is] Maybe not inflationary. But maybe not disinflationary," he told The Business.
"In a mechanical sense, it decreases the CPI. If we take a step back and think about what the government is doing and the government spending, they have $12 billion in this financial year.
"For a given level of goods and services they are spending more and that can only lead to more inflation in a general sense, so that will be a question for the RBA governor about [whether it’s a] big inflationary impact or a small one and what sort of response [is needed]."
Could this lead to another rate rise?
Not all economists are convinced by Mr Chalmers's spiel that the budget would not impact inflation.
Chris Richardson from Rich Insights said the injection of government spending could prompt the RBA to lift the cash rate even higher, past its current rate of 3.85 per cent.
"A lot of the spending that the government is doing is the right stuff. The increase in JobKeeper — and it is not enough — that's all great, but if you really wanted to do that fairness stuff and at the same time keep the Reserve Bank on the bench, I'd say you needed to take some tough decisions and we haven't seen those tough decisions in this budget," he said.
"The budget does inject extra money into the economy that will be spent.
"I had thought after the surprise rate rise from the Reserve Bank last month that they were done and dusted. I'm less clear now that that's the case."
He said any potential rate rise would take time to come into effect.
"To be fair, it will take time. Government spending takes time to work its way through the economy, but this is a fair amount of extra money going into an economy with an existing inflation problem. They're [the RBA] going look at this closely."
'Missed opportunity' for Chalmers
Chief economist from Macroeconomics Advisory, Stephen Anthony, said the budget needed tougher measures to combat high inflation.
"This was Jim Chalmers's chance to really cut some fat out of the budget to fight the inflation fight. He's missed that opportunity," he told The Business.
"In fact, he's a net spender. Over his two documents so far, his two budgets over the last 12 months.
"So he's making life harder for the RBA, and for working Australians, because he's not getting to the meat of the problem."
He believes cutting government spending would help get to the heart of the problem.
“That requires cutting spending in net terms, by some target, perhaps a half per cent, or 1 per cent of GDP. And, of course, quarantining the disadvantaged from that process," he said.
"So the people that benefit from the upswing, they would bear the price of that bear the cost of that through hopefully tax reforms, but also through less public spending on them."
