Australia’s inflation will peak at an annual rate of 7.75% by the December quarter of 2022 and fall gradually, allowing wage growth to begin providing workers with real salary increases by the 2023-24 fiscal year, the treasurer, Jim Chalmers, has said in his financial statement.
Describing the nation as facing both “once-in-a-generation” challenges and opportunities, Chalmers used his statement to parliament on Thursday to provide updated economic forecasts as well as reiterate priorities for the new government.
As reported earlier, “headwinds”, particularly from overseas, prompted Treasury to slice half a percentage point off GDP growth estimates for the fiscal year that just ended, the current one and next year.
Chalmers’ speech is his first major one since taking on the role after Labor’s May election win. It helps set out the government’s priorities before a planned jobs summit at the start of September and a formal budget in October.
While slower growth would dent the revenues, Chalmers said, the government would inherit a budget that ended 2021-22 with “a dramatically better-than-expected outcome”. Final figures would be released soon.
That result, though, was one of the few that is likely to be better than forecast by the Treasury before the 21 May federal election. Inflation, in particular, will be higher for longer.
While the pre-election economic and fiscal outlook predicted that the consumer price index would be running at 4.25% by the end of June, Wednesday’s data release showed it had accelerated instead to 6.1%.
By the year’s end, though, the headline CPI number will have quickened further to 7.75%, a number that was last exceeded in the March quarter of 1990 when it reached 8.7%.
Instead of subsidizing to 3% by next June, Treasury now expects it to still be running at an annual pace of 5.5% before sinking to half that, or 2.75% by June 2024.
By then, though, real wages will finally be growing faster than CPI, with 3.75% growth expected. Before then real wages will continue to shrink, an issue Chalmers was at pains to blame on the previous near-decade of Coalition rule.
“In the year to March, real wages fell 2.7% – the worst result in more than two decades,” he said, adding that the slide will be shown to have accelerated further when June quarter wage numbers land on 17 August.
“The wages of Australian workers are not causing this inflation,” he said. “The fault lies with a decade of wasted opportunities, wrong priorities and wilful neglect – that Australians are all now paying for.”
The challenges Australia faces include slowing global growth, particularly in the US – where the Federal Reserve again raised rates overnight – and China. The Treasury trimmed its estimate of global expansion by half a percentage point to 3.25% for 2022 and 2023.
Chalmers also noted that the International Monetary Fund now expects global inflation to reach 8.3% by the end of this year, driven by higher food and energy prices, and strained supply chains.
He said the headline inflation rate would return to the 2% to 3% target range used by the Reserve Bank by the middle of 2024. The RBA, which is widely expected to lift interest rates by another half percentage point to 1.85%, will release its own forecasts on 5 August with its quarterly monetary policy.
While higher costs for borrowers will put the financial squeeze on the roughly one-third of households with mortgages, they will also start putting a strain on the federal budget.
“We know that the interest payments on government debt will be the fastest growing area of government spending – faster than the NDIS, aged care and hospital funding,” Chalmers said.
While the 2021-22 budget will come in better than forecast, short-, medium- and longer-term pressures were becoming “more pronounced”, he said.
“The temporary improvement in tax receipts may not persist over time, the impact on payments will persist and the cost of interest on debt will grow as more debt is refinanced at higher yields,” Chalmers said.
Since taking office, the government had been forced to spend $1.6bn on additional Covid-related costs this year alone.
“We expect that government payments will be around $30bn higher over the forward estimates than was forecast pre-election, because of inflation and wage expectations and how they flow through,” Chalmers said.
Other drags on the economy will be slower-than-forecast exports, as the effects of floods and other impacts slow some shipments abroad.
“Weaker dwelling investment is also part of the story – because of higher interest rates, but also the capacity constraints in construction,” the treasurer said.
The jobless rate offers a slightly dimmer view too. The unemployment rate at June was 3.8% – and fell to 3.5% in July – was slightly better than predicted before the election. By next June the Treasury now expects the jobless rate to be 3.75% rather than the previous forecast of 3.25%.
The government’s economic response will target three priorities. It will cut childcare costs for about 1.26 million families, and reduce barriers for parents – overwhelmingly women – to work extra hours. Prescription costs will also be cut by as much as $12.50 a script.
Training would also help lift opportunities for people to secure higher wages, Chalmers said, as would government investments in new industries.
A third leg would be efforts to “unclog and untangle our supply chains” to help quell inflation. Investments in “cleaner, cheaper more reliable energy” would also help, as would the government’s national reconstruction fund “to make us more self-reliant”.