Monday, October 3, 2022

Economists warn budget spending will contribute to inflationary pressures

news, latest news, economy, inflation, budget, interest rates

The federal government’s stimulus package of nearly $ 9 billion could drive inflation and encourage a faster rate hike by the central bank. Economists have warned that the budget’s cost-of-living package of $ 8.9 billion could put additional pressure on inflation, which could force the Reserve Bank of Australia to start lifting the cash as early as May. A number have noted that the budget adds unnecessary stimulus to an already hot economy and does not address major reform issues needed within the tax system. The concern is fueled by cash handouts and tax deductions to pensioners and low- and middle-income earners, used by Treasurer Josh Frydenberg as a measure to ease recent cost-of-living pressures. Higher inflation could cause a faster and steeper rate hike by the RBA. Budget forecasts outlined that inflation for this year’s fiscal year would reach 4.25 percent due to rising costs spurred by a surge in fuel prices and material and supply constraints. The RBA’s inflation target to stimulate movement on the cash rate is between 2 and 3 percent. READ MORE: Brendan Rynne, chief economist at KPMG, said the proposed one-off payment of $ 420 through the low-to-middle-income tax settlement could further fuel the “inflation genius”. “One impact of this payment is likely to be a further stimulation of the inflationary spirit rather than generating much more economic activity,” Dr Rynne said. “The budget’s temporary cost-of-living measures will contribute to consumption and price pressures in an already tight market.” Dr Rynne also stressed that the budget “is light on measures that will affect significant budget recovery over the medium term, with no major tax reforms included”. Mr Frydenberg’s fourth budget revealed a $ 20.9 billion improvement in the underlying cash deficit to $ 78 billion, with the Treasury’s outlook expecting unemployment to reach 3.75 per cent by September. Cherelle Murphy, chief economist of Ernst and Young, noted that the stimulus package was relatively small, but noted that the additional injection would put extra pressure on the RBA and its monetary policy decision. “The economy really does not need additional cash at the moment,” she said. The RBA is expected to raise rates later this year, but faster-than-expected inflation could lead to an earlier tightening of monetary policy. Economists believe the RBA is on an abyss of up to 13 increases with the rate likely to sit around 2 percent by the end of 2023. The Commonwealth’s halving of the fuel excise tax is expected to reduce inflationary pressures by half a percentage point. ANZ economist David Plank said the budget is mostly a political document and there are other alternative measures that could be addressed to reduce the pressure on cost of living. Mr Plank also noted that the Treasury’s economic forecasts were on the conservative side. “If it turns out that the numbers are conservative and additional revenue is being issued, (the question) is what is being done without additional revenue,” he said. “My hope would be that there is a very strong case that additional revenue is being banked and flowing through to a reduced deficit rather than being spent.”

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