Economists are divided on whether the budget spending will fuel inflation and force another rate hike,but financial markets made no change in their outlook on Wednesday and are assuming no further interest rate increase this year.
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“I had thought the Reserve Bank was done and dusted,but there’s a risk that the extra spending in the budget would add to the pressure on inflation and bring the Reserve Bank off the bench,” said Rich Insight economist Chris Richardson.
Westpac chief economist Bill Evans had a neutral view of the impact on inflation,however,from the cost-of-living measures on Medicare,income support and more.
“I think those policies were necessary,and I don’t expect them to put upward pressure on interest rates in the near term,” he said,adding that he expected interest rates to fall next year.
Chalmers defended the budget outlays on Medicare,energy,unemployment benefits,rent assistance and income support by pointing to Treasury analysis that showed the energy subsidies would reduce inflation by 0.75 percentage points and help cut the headline rate to 3.25 per cent by June 2024.
But the Treasury analysis did not consider all the additional spending in the 2024 financial year,which amounts to at least $12 billion and includes other measures such as help for small businesses and new subsidies for medicine.
Another spending measure not included in the $12 billion is the federal pledge to lift wages for aged care workers,costing about $2.2 billion each year.
Coalition treasury spokesman Angus Taylor said the budget would make inflation worse,while Dutton used his first question in parliament on Wednesday to target the government on the forecast for net overseas migration.
“There’s no plan for where these people will live during the housing and rental crisis,” Dutton said.
“Economists point out that this year’s unplanned migration program is inflationary and is going to keep interest rates higher for longer. Why didn’t the treasurer make any mention of this in his speech last night?”
Opposition Leader Peter Dutton used his first question in parliament to tie migration to inflation.Credit:Alex Ellinghausen
Prime Minister Anthony Albanese dismissed the attack as evidence of hypocrisy because Dutton had responded to the government’s increase in thepermanent migration intake last September by saying it was “too little too late”.
The budget papers show the government expects400,000 migrants this financial year in net terms,as previously reported,followed by 315,000 in the 2024 financial year and 260,000 in every year after that. Dutton said this meant 1.5 million migrants over five years.
Dutton was minister for home affairs when the Coalition government issued the April 2019 budget with a forecast for 1.3 million migrants over five years to 2022. The pandemic halted that flow.
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Professor of demography Peter McDonald,of Melbourne University and the Australian National University,said migrants such as students and young workers tended to use share housing and could not afford heavy spending that pushed up inflation.
“The main point is that the effect would be quite marginal because migrants in one year are a tiny proportion of the population,” he said.
“The impact on demand is on the margins,it’s not enormous,although in areas like housing it can be more significant.”