Tuesday’s long promised pseudo-budget-slash-statement from the Albanese government would normally dominate markets but not this week – it will be the September quarter’s Consumer Price Index on Wednesday that will be the most important event because of the influence it will have on the Reserve Bank’s monetary policy decision on November 1.
For all the publicity, warnings and leaks from the government about what is in the financial statement, the size of the annual inflation rate in the September quarter will be the key figure – not the size of the budget deficit, spending and taxes.
One thing is clear from all the lead-up noise is that thanks to Vlad Putin and the strong labour force, Australia’s budget position is stronger than any other country heading into 2023.
Inflation is both a huge concern and a huge benefit but one thing is now clear – floods and heavy rain will support higher inflation deep into 2023, but nothing will support real wages growth.
All that is being written and spoken about the effect of higher wages is just rubbish – we have had a continuing labour shortage crisis now for more than 18 months (even longer in some sectors such as resources), made worse by the impact of La Niña’s big wet and floods, and yet wages growth has hardly budged.
The budget will forecast no real wages growth until 2024-25 which means two more years of wage stagnation and millions of people and families falling behind at a time of higher interest rates, food costs and falling house prices.
At some stage consumer demand will run out of puff and slow and then fall, which would be bad news for car sellers, electronics, supermarkets and a host of service sector companies.
That holds the potential for sharp slowdown looking out into 2024-25 if there’s a sharp rise in unemployment triggered by the rise in interest rates. That’s why the RBA’s rate rise will be another 0.25%, rather than double that.
AMP chief economist Shane Oliver sees annual inflation reaching 7.1% in the quarter with a 1.7% rise quarter to quarter. The Australian Bureau of Statistics will (ABS) also release the new monthly inflation indicator for September which will flesh out the quarterly data.
That is well short of the 10.1% annual rate in the UK and 8.2% in the US. NZ consumer prices rose 7.2% in the year to September, according to data out last week. That was higher than expected.
“Petrol prices are expected to fall but food, rents, insurance, new dwellings & holiday travel are likely to see strong increases. Electricity prices are a source of uncertainty as regulated prices rose sharply but this may be offset by WA and Queensland subsidies, Dr Oliver wrote at the weekend.
He also says core inflation via the trimmed mean inflation rate to rise 1.5% from the June to the September quarter for an annual growth rate of a high 5.5%.
Both CPI and trimmed mean inflation are expected to rise to their highest since 1990, according to Dr Oliver.
“As this is broadly expected to be in line with RBA forecasts its likely to be consistent with another 0.25% rate hike in November.
Producer price inflation for the September quarter will also be released on Friday, a day after the international trade indices. October business conditions PMI’s (Monday) will be watched for any slowing.
Along with an update on the economy from Treasurer Jim Chalmers,
tomorrow night’s budget-like statement will include the implementation of key measures such as expanding the childcare subsidy and extending paid parental leave to six months; more for Medicare, aged care and the NDIS; cheaper prescription drugs; spending on renewable energy; increased defence spending; increased spending on TAFE and universities; and the introduction of some of its housing schemes.
The Budget will likely also make much of infrastructure spending but we are unlikely to see much in the way of additional infrastructure spending than what has already been budgeted for and announced.
There may be some minimal & targeted cost-of-living measures and maybe something more on trying to keep energy costs down and subsidies for electric cars and spending on charging networks.
Dr Oliver says increased spending is likely to be offset by a cut in public sector spending, a cut in “waste and rorts”, cuts to regional infrastructure funds, a crackdown on tax avoidance, increased tax on multinationals and a possible cap on superannuation balances around $5 million.
The Government has already deferred any decision on the Stage 3 tax cuts due in 2024.
While there will be a revenue windfall, thanks to higher commodity prices, lower unemployment and higher inflation, it shouldn’t be seen as being permanent.
The windfall (rumoured to be as much as $150 billion over the forward estimates (four years) – will likely a lower budget deficit to be forecast in the next year than projected in March.
But the projections are unlikely to show a surplus due to spending pressures (on aged, NDIS, health, defence and interest costs) and lower real growth assumptions.
Dr Oliver says the statement is likely to put the 2022-23 deficit at around $40 billion, above the $32 billion in 2021-22 but below the $78 billion projected in March.
Deficits for subsequent years are likely to see only a modest fall in the size of the forecast deficits from that projected back in March reflecting structural spending pressures (NDIS, Defence especially) and the quite right assumption that commodity prices fall from current levels.
