The Albanese government has “rolled the dice” on the economy and its third budget is likely to at least delay the next interest rate cut by the Reserve Bank, if not provoke another increase, ex-RBA board member Warwick McKibbin and other economists say.
The treasurer, Jim Chalmers, unveiled a second consecutive budget surplus on Tuesday although future years are projected to report sizeable deficits. Westpac estimates the government will pump into the budget an extra $20bn in spending in 2024-25 and 2025-26.
McKibbin, who is now the director of ANU’s Centre for Applied Macroeconomic Analysis and served on the Reserve Bank from 2001-2011, said the extra spending was “such a risky strategy” when current interest rates were already probably too low to rein-in inflation.
“By December, my guess is interest rates are going to be higher than they are today,” he told Guardian Australia on Wednesday. “Inflation is going to be higher, and the government is going to be in deep trouble.”
The government has argued that its $300 electricity rebate for every household, a 10% increase in rent assistance and a freeze on some medical prescriptions would place downward pressure on inflation even as the budget swings from surplus to deficit.
Treasury predicted that with household consumption all but stalling this financial year, some uptick in government spending – at federal and state level – could be accommodated. Headline inflation, at 3.6% in the March quarter, will also sink back to within the RBA’s 2%-3% target range by December, the budget projects.
Economists at the big four commercial banks gave mixed reviews on whether the budget would have a material effect on inflation and the RBA’s actions.
Westpac was perhaps the most positive about the budget, saying that treasury’s forecast that inflation could be down to 2.75% by next June was “a little below our own but it is entirely plausible”.
CBA, which until recently had forecast rate cuts in each of the RBA’s final three meetings of 2024, said the budget “represents a larger‑than‑expected easing of fiscal policy”.
“The risk is now more real that the first interest rate cut could be delayed and that the neutral cash rate is higher than we currently estimate due to the expansionary fiscal setting and the high level of investment in the economy,” the bank said. It predicts the RBA will cut the 4.35% cash rate by 25 basis points in September.
McKibbin said the cash rate should be around 5%. Evidence from the US and elsewhere – including inflation figures out on Tuesday – indicated inflation would prove stickier than people expect even with the US rates sitting at 5.5%-5.75%.
The government should have made more effort to improve the efficiency of the economy if they couldn’t find savings to offset spending increases – “That’s why productivity is so important and they’re just not addressing it,” McKibbin said.
McKibbin said the government appeared likely to make expensive mistakes with its $22.7bn so-called Future Made in Australia package. Taking the refining of silica for solar panels as one example, he said high wages and regulatory burdens were the reasons such investments weren’t made now.
With the opposition vowing to scrap the plans – which the shadow treasurer, Angus Taylor, dubbed “billions for billionaires” – developers would also have to weigh up the political risks of making such investments.
“The whole thing makes absolutely no sense when there’s no consensus on key policy frameworks here,” McKibbin said.
Australia would find it difficult to reach the scale of investments needed to have a competitive edge in industries from green hydrogen to quantum computing. Even if there was a national security interest served by diversifying risk away from China, it remained unclear why Australia would need to seek to carve out production in so many areas.
“If we don’t trust the Americans or the Japanese or the Europeans [for] our production networks, we’re in bigger trouble than we thought,” McKibbin said.
