Concerns budget spend will fuel inflation
Colin Brinsden, AAP Economics and Business Correspondent |

Josh Frydenberg’s fourth budget has received a tick of approval from major global credit rating agencies, but there are concerns among economists spending to ease cost-of-living pressures will further fuel inflation.
While the treasurer’s pre-election budget cut deficits by around $100 billion out to 2025/26, it also spends tens of billions of dollars, including $8.6 billion in cost-of-living measures for households.
Financial markets already see the risk of an interest rate by the Reserve Bank of Australia as early as June, with economists expecting inflation to accelerate to at least five per cent compared with an already high rate of 3.5 per cent.
“This budget delivers further fiscal stimulus near term and, at the margin, it adds to the pressure for the RBA to begin policy normalisation sooner than later with emergency cash rate settings looking increasingly inappropriate,” RBC Capital Markets chief economist Su-Lin Ong said.
The markets are pricing in a cash rate of around 0.3 per cent by June, compared with the current record low of 0.1 per cent.
“It will be interesting to see how the Reserve Bank responds to this budget next Tuesday, when it meets to consider interest rates,” CPA Australia’s Jane Rennie said.
Committee for Economic Development of Australia chief economist Jarrod Ball said the short-term quick fixes would be welcomed by many.
“But the budget has only taken modest steps to permanently lift the capacity of households to navigate the growing pressures on the economy,” he said.
“With growing inflationary pressures and interest rate rises on the horizon, cost-of-living pressures will not dissipate any time soon and these measures do not provide a long-term solution.”
But Mr Frydenberg’s defended his 50 per cent cut to the 44.2 cents per litre fuel excise, an additional tax break for low and middle income earners and a one-off payment to pensioners and the unemployed.
“We have responded to the needs of Australians right now with cost-of-living relief,” he told ABC radio.
“There is a need right now for this targeted, temporary, responsible support.”
Labor will wave through the initiatives, at a time when real wages are going backwards.
“There is a role for cost of living relief in the budget,” shadow treasurer Jim Chalmers told ABC radio.
“What’s missing from the budget is a plan beyond May. This government is temperamentally incapable of seeing beyond the May election.”
Still, Standard & Poor’s said the improvement in the budget bottom line has been faster than previously anticipated, underpinning Australia’s AAA rating and stable outlook.
“The outcome would have been stronger had the government not announced additional spending in the budget to ease cost-of-living pressures,” S&P said.
Australia remains one of a small group of 11 countries to be rated AAA by S&P, a level it has held since 2003.
Moody’s Investors Service ranks Australia similarly.
Moody’s vice-president Martin Petch said the budget improvement reflected the flexibility of the Australian economy and the effectiveness of its macroeconomic policy response to the coronavirus pandemic.
“This, and unexpected strength in commodity prices, have driven a solid economic recovery and lift in government revenues,” he said.
AAP