(Bloomberg) -- Australian Treasurer Jim Chalmers will need to find a way of wooing voters while keeping spending under control when he hands down his pre-election budget in parliament on Tuesday.
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The fiscal blueprint he delivers needs to boost spending to ease cost pressures on disgruntled voters and offer them prospects for improvement under a second-term Labor government. Yet Chalmers must also contain the deficit to avoid potentially rekindling inflation and limiting further interest-rate cuts.
Australia must hold an election by May 17 and the Labor government is almost neck-and-neck with the center-right opposition coalition in polls. The government has already opened its pocket book: AMP Ltd. tallies that since January it has pledged A$35 billion ($22 billion) over the next four years on healthcare, roads, national broadband, reducing student debt and other areas.
The budget and looming election come as the Reserve Bank is battling to return underlying inflation sustainably to the 2.5% midpoint of its target. The RBA cut rates last month, while cautioning against expectations of further near-term easing because it wants to see more evidence that inflation is slowing further.
Higher government spending, as well as a persistently tight labor market, could rekindle price pressures.
Economists reckon Tuesday’s budget will include an extension of power rebates for households — to offset a looming electricity price rise — further rental relief, subsidies for industries hurt by US tariffs and additional disaster relief for cyclone damage in the northeastern state of Queensland.
“Expenditure-to-GDP will remain above the long-run average, remaining additive to demand at a time when public demand is pretty much back to its historic high,” said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada. “This will be a key factor in RBA policy deliberations and will likely temper how much easing it can deliver.”
Chalmers does have an advantage: the budget is likely to reap a revenue windfall from low unemployment and high key commodity prices. That gives the treasurer scope to spend without blowing out the deficit.
What Bloomberg Economics Says...
“Revenue upgrades from commodity prices and a stronger labor market could boost the bottom line by A$10-15 billion, and potentially more depending on forward assumptions. With an election looming, the temptation to fund additional spending is high, but this could complicate the RBA’s rate cut trajectory if additional funds are not directed carefully.”
— James McIntyre, economist
The median estimate of economists surveyed by Bloomberg is for the books to be in the red to the tune of A$20 billion in the current fiscal year, an improvement on the A$26.9 billion expected by Treasury in December. They estimate the deficit will swell to A$40 billion in the 12 months through June 2026, also better than the A$46.9 billion Treasury saw in its mid-year review.
Yet most economists polled expected Tuesday’s budget was likely to hinder not help the Reserve Bank’s efforts to rein in consumer prices.
The problem is the extra cash being pumped into the economy at a time when core inflation remains above the top of the RBA’s 2-3% target. Governor Michele Bullock has already said not to expect further imminent easing as policymakers monitor a tight labor market.
The jobless rate held at 4.1% in February and has remained at historically low levels throughout Labor’s nearly three years in office. That’s helped strengthen revenue with more people paying taxes and less cash shelled out for welfare. But it’s also a potential source of price pressures.
Money markets are nonetheless currently wagering about an 80% chance the RBA will cut rates three more times through the first quarter of next year.
Gareth Aird at Commonwealth Bank of Australia reckons that the risk is less with the budget than with spending pledges made during the ensuing campaign.
“There’s going to be a difference between what’s in the budget next week and what the government may announce between then and the election,” said Aird, head of Australia economics at CBA.
“And then of course, we need to see what the coalition announces. And we still don’t know who’s actually going to win government. So there’s quite a bit of uncertainty around the outlook for fiscal policy.”
For Chalmers, the balance is to keep the bottom line looking prudent while spending enough to lure back as many voters as possible to the government. Recent polls suggest Australians want more budget largess.
The expected timing of the RBA’s policy meetings, the next key inflation release and the election may aid the treasurer’s efforts.
The central bank’s rate-setting board next meets March 31-April 1 and markets and economists expect no change then. The reason is that policymakers will want to wait to see first-quarter inflation that’s released on April 30.
The government is expected to call an election for either Saturday May 3, May 10 or May 17. The RBA’s subsequent meeting is May 19-20, meaning the vote will have been held before the board decides whether to stand pat or cut again.
“Government spending has increased to a record share of our economy,” said Diana Mousina, deputy chief economist at AMP. “At the same time the government has tried to reduce measured inflation through things like the electricity rebate, rental assistance, to try and reduce measured inflation and change people’s inflation expectations.”
--With assistance from Shinjini Datta.
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