The federal budget is expected to go even further into deficit over the next few years, with this week’s mid-year update painting a bleak picture for the possibility of much-desired interest rate cuts in Australia.
The sentiment from the Labor government this week in the mid-year economic and fiscal outlook is defensive after a $22bn blowout in budget deficits was revealed with government debt surpassing $1trn.
It comes after governor Michele Bullock used the Reserve Bank of Australia (RBA) board’s final post-cash rate decision press conference of the year earlier this month to caution against government spending and the roll on impact mortgage holders are continuing to feel.
Treasurer Jim Chalmers is, however, pushing back on accusations the mid-year figures this week reveal he has not heeded the RBA’s warnings.
“What the Reserve Bank governor has said publicly before is that public demand is not the main game when it comes to inflation and interest rates, and if anything, the fact that we handed down two surpluses in our first two years was helpful to the fight against inflation,” he argued on the ABC.
“We’ve also shown that we’ve got that deficit for this year even smaller, and it’s now almost half what we inherited when we came to office.
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Treasurer Jim Chalmers says the government is “running a tight ship” when it comes to finances. Picture: Picture: Getty
“We’re running as tight a ship as we can. We’re obviously conscious of and focused on the fight against inflation, and in that regard, we work closely with the governor of the Reserve Bank.”
Private sector woes
The large growth in public spending and the lagging private sector under the Albanese government has featured heavily in Ms Bullock’s public addresses this year following cash rate decisions.
The 4.35% cash rate has been in place since last November, with economists widely predicting cuts will not begin until April.
While homeowners across Australia are continue to struggle, the government and the central bank have remained united in their defence that they are working together harmoniously.
Mr Chalmers this week said he had “gone out of [his] way” to personally brief Ms Bullock on budget updates through 2024.
“When we’ve got budgets and budget updates, I personally brief the Reserve Bank governor so she knows what’s coming, she knows what we’re grappling with, and knows what the various bottom lines and different aggregates are,” he confirmed.
RBA governor Michele Bullock has issued veiled warnings on government spending this year. Picture: NewsWire / John Appleyard
“I took the opportunity earlier this week to do that, and that’s because I acknowledge that we’ve got the same interests and objectives here to get on top of inflation without ignoring the risks to growth. That requires us to work together where we can.”
Red ink
In the mid-year economic and fiscal outlook statement, the government noted the economy had “slowed more than expected” in 2024, pointing the finger at high interest rates, cost-of-living pressures and geopolitical instability.
“Despite these challenges, the Australian economy has outperformed many advanced economies and is on track for a soft landing,” it read. “The economy has continued to grow, and inflation has moderated substantially.”
Shadow treasurer Angus Taylor used a press conference this week to label the budget outlook “red ink as far as the eye can see”.
“This is the biggest spending government we have seen out of outside of wartime or crisis,” he warned. “We’ve never seen a collapse like this, and it’s the worst of any of our peer countries.”
The economy is expected to grow at 1.75% in 2024/25, the outlook states, before recording real GDP growth of 2.25%, 2.5% and 2.75% in the years following.
“In many advanced economies, the decline in inflation has not been smooth,” it read. “Higher interest rates and cost-of-living pressures weighed on households in 2023–24, resulting in weak household consumption and lower savings.”
Australian Industry Group chief executive (CEO) Innes Wilcox said “inexorable” government spending was adding to the downward pressure on inflation and interest rates rather than alleviating it.
“No solutions are being offered to wind in the flagged growing structural deficits with debt expected to hit $1 trillion in 2025/26,” she said. “The key is that governments must control their spending and refocus their priorities to lift national productivity.”
Business Council CEO Bran Black agreed a private sector-led recovery “built on investment environment” was more crucial than ever.
“Increased government spending unlinked to productivity gains makes it harder to bring down inflation,” he said.
“The past decade’s productivity growth is at its lowest level in 60 years.”
