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News update

Budget 2024-05: Economic and fiscal overview

By: Daniel Popovski, Senior Policy & Advocacy Advisor, Governance Institute of Australia Ltd

Economic and fiscal overview 

Higher unemployment, lower economic growth, and inflation to cool sooner than expected are some of the key Treasury forecasts in the 2024-25 Federal Budget. 

Fiscal and monetary policy at odds

Economic growth has been revised down by Treasury, predicted to come in at 2 per cent in 2024-25 and 2.75 per cent in 2025-26, 0.25 per cent lower than previous Treasury forecasts.  

The downgrade is driven by global economic uncertainty, persistently high inflation and interest rates impacting discretionary spending.  

Treasury has also revised down inflation forecasts anticipated to drop within the target range of between 2-3 per cent, at 2.75 per cent to end of fiscal year 2025-26.

Treasury’s prediction that inflation will fall to 3.5 per cent by the end of this financial year is at odds with the RBA which suggests inflation will pick up from 3.6 per cent currently to 3.8 per cent by the end of financial year and remain there until the end of 2024.  

Managing inflation and the cost-of-living crisis will become a key issue as we head into an election year.  

The critical challenge for Treasurer Jim Chalmers’ third budget is aligning fiscal settings with contractionary monetary policy to avoid unnecessarily prolonging high inflation. 

This means responsible spending and increasing tax revenue to effectively pay down debt and contain government expenditure.  

The Government is anticipated to announce a series of large spending items, including the revised Stage 3 tax cuts, worth more than $23 billion coming into effect on 1 July, 2024. 

It’s not yet known how taxpayers will respond to tax savings, but there is a risk that higher discretionary spending could prolong inflationary pressures.  

Finance Minister Katy Gallagher signalled $27.9 billion in savings to deal with internal inefficiencies and reprioritising $15.4 billion in unfunded projects with a focus on measures targeted to address cost of living pressures.   

The challenge ahead

Treasury estimates that the unemployment rate will increase through to 2025, with predictions that it will rise from 3.8 per cent to 4.5 per cent over the next 12 months.  

Higher unemployment is bad news for a government grappling with increasing pressure to fund essential services and infrastructure, whilst prioritising fiscal repair. Gross debt is tipped to spill over the $1 trillion mark for the first time in Australia’s economic history.  

The Treasurer predicts that taxpayers will save approximately $80 billion in interest payments over the next decade as the government attempts to manage public debt.  

However, managing the public debt burden will be harder if there are more welfare recipients and fewer taxpayers. 

Productivity and resilience key pillars for future growth 

A focus on boosting productivity and economic resilience will be necessary to allow the Australian economy to navigate through further headwinds.  

In our pre-budget submission to Treasury, we called on government to lay the foundations for a dynamic, safe, and resilient economy by: 

  • prioritising productivity reforms to address escalating costs on business and inflationary pressures across the economy 
  • securing and strengthening our cyber defences to support trust and confidence in Australia’s digital economy 
  • driving the efficient allocation of resources through modern regulatory architecture and  
  • assisting the business community on its journey to a low-emissions economy.  

Addressing our languishing productivity gap is key to lower inflationary pressures and driving higher living standards for all Australians.  

 

Policy submissions 2024 2.0

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