No, the budget is not inflationary

by Greg Jericho



For a budget to be inflationary there needs to be actual evidence of surging demand. In this budget we have the opposite

Had you been listening to the media after the Budget was released you could be forgiven for thinking that the government has unleashed a massive stimulus plan that is going to send interest rates higher. Such concerns however are woefully misguided and lack a true consideration of the economic picture.

Firstly, the $300 energy rebate will reduce inflation because the ABS calculates the price of energy by the actual cost paid by consumers. There has been some misguided commentary suggesting that this will only reduce “measured inflation” as though there is some mythical non-measured inflation that is the real amount. Government intervention affects inflation all the time – whether it be via increases in tobacco excise or changes to the cost of university tuition fees, or through subsidies.

We know that in the past government subsidies on things such as childcare and energy have had a significant effect on CPI.

The response from these critical economists is that this will lift demand in the economy because it is in effect free money that people will go out and spend on non-essential items that will in turn drive up prices.

Such a view is wrong because of a number of factors.

Firstly the rebate will not be noticed in the same way as a stimulus cheque would be. It is noticed in the absence – by way of a lower electricity bill than people otherwise would have had to pay. But they will still get a bill! Believing that people will see the rebate in their bill and think they have money to now go and spend is to fly in the face of human experience. And while people will have $300 to devote to other spending, that money will be spent diffusely throughout the economy – on other bills and on retail and services.

Secondly, the cost of the energy rebate is $2.6bn in 2024-25. Australians spent $35bn on retail in just the month of March! As a stimulus measure it hardly registers.

But the overwhelming reason why this budget is not inflationary is to look at the actual level of demand in the economy.

If we look back to the mining boom period private sector demand was growing at well over 4% each year. In the year after the GFC off the back of massive stimulus, private demand hit 4.5% and then 6.2% in 2011-12. By contrast private demand in 2024-25 is predicted to grow just 1.8% followed by 3% in 2025-26. That is not a sign of private sector running hot; that is a sign of a private economy teetering on the edge of a recession.

At such times the right thing to do is for the government to provide assistance and stimulus. The energy rebate is the appropriate way to respond to higher energy prices due to supply shocks. Trying to reduce inflation that has come from a supply shock by raising interest rates to reduce demand is like suggesting someone is unfit and needs to run more all the while ignoring the reason they are less fit than usual is they are recovering from major knee surgery.

As it is the level of public demand growth in the economy next year is 4.5%. This would be the third lowest level of growth in the past 9 years. It would be lower than the increase in public demand that occurred during the mining boom!

Inflationary? Hardly. And given the weak level of economic activity projected over the next 2 years you could better argue the government is not providing enough stimulus to the economy.

Some economists and commentators who are complaining about inflationary pressures from this budget need to start showing evidence of too much demand in the economy, because all the data suggests the complete opposite.

Between the Lines Newsletter

The biggest stories and the best analysis from the team at the Australia Institute, delivered to your inbox every fortnight.

You might also like

Stage 3 Better – Revenue Summit 2023

by Greg Jericho

Presented to the Australia Institute’s Revenue Summit 2023, Greg Jericho’s address, “Stage 3 Better” outlines an exciting opportunity for the government to gain electoral ground and deliver better, fairer tax cuts for more Australians.

Richard Denniss: National Press Club Address

by Richard Denniss

On Wednesday, 31 January 2024, Richard Denniss and Allegra Spender MP addressed the National Press Club for a debate on the Stage 3 tax reforms. **Check against delivery** [See below for transcripts] Tax is good. Tax is an investment in our society and the highest taxed countries in the world also happen to be the