Updated ,first published
Spending cuts will sit alongside proposals to get the economy growing faster and a plan for further tax reform in the May federal budget as Treasurer Jim Chalmers attempts to push back increasing claims that government expenditure is adding to inflation.
As the Coalition accused Chalmers of not understanding economics and the government’s impact on the economy, the treasurer revealed on Sunday that the May 12 budget would have a discrete series of spending measures.
Since the Reserve Bank lifted official interest rates last week, with financial markets expecting at least one more rise by June, Chalmers has come under pressure over the contribution of government spending to the bank’s decision.
Inflation rose to 3.8 per cent in December and the Reserve has forecast it to hit 4.2 per cent by mid-year. In his budget update, Chalmers forecast inflation to reach 3.75 per cent by June.
Pressed on the state of the budget, which Chalmers had forecast to show a deficit of $36.8 billion this financial year and then $34.3 billion in 2026-27, the treasurer said spending cuts, productivity reform and tax would be the document’s key elements.
“The budget will be about productivity. We’re working up a productivity package,” he told the ABC’s Insiders program. “There will be a savings package that we’re working on. [And] we’ll consider whether more steps can be taken on tax reform.
“But overall, it will all be about lifting the speed limit on the economy, making sure we can grow quicker with lower inflation, attracting investment, dealing with intergenerational issues, and also continuing to get the budget in better shape.”
The opposition and many economists have said government spending has hindered the Reserve Bank in its job of controlling inflation. On Friday, RBA governor Michele Bullock admitted public and private spending were adding to aggregate demand, which was growing too fast.
Chalmers told his masthead the government had made more than $114 billion in savings since coming to office and was on track to improve the budget by $233.5 billion by 2028-29. He said of the increase in spending, since 2022-23, almost $40 billion was effectively “automatic” changes such as support to veterans and retirees plus there had been an increase in natural disaster relief.
Real spending over the past three years had increased by 3.2 per cent, while the economy had expanded by 6.3 per cent.
But shadow treasurer Ted O’Brien said public demand lifted by 1.2 per cent in the September quarter, more than the 1.1 per cent figure for the private sector. He said that as public spending grew faster than private spending, the government was disproportionately affecting total demand and inflation across the economy.
“If the treasurer does not understand the problem, then he cannot be relied upon to fix it,” he said.
“The bottom line is that at a time when families are struggling with higher mortgage repayments and the cost of living, the government should be helping take pressure off the economy, not adding to it.”
The September national accounts showed federal government expenditure lifted by 0.5 per cent in the quarter or by $412 million to $75.5 billion. The Bureau of Statistics noted much of the increase was driven by Medicare and pharmaceuticals, which are both largely affected by consumer demand. The government spent another $6.1 billion, an increase of 5 per cent or $313 million, on capital works.
State and local government spending grew by 1 per cent or $828 million to $82.2 billion. The states and local councils spent another $20 billion on capital works, a 1.4 per cent, or $266 million, increase.
Over the same period, household spending increased by $1.8 billion (0.5 per cent) to almost $354 billion while business investment jumped by 3.2 per cent or $2.5 billion to $82.3 billion. Total GDP for the quarter was a record $688 billion.
This masthead revealed last week that the government is considering changing the 50 per cent concession on the capital gains tax as part of a broader tax package.
Chalmers refused to be drawn on whether the government would move on the concession, which many economists have argued added to home price pressures when it was introduced by the Howard government in 1999. But he said any tax reform would take into account how the tax system may hurt younger Australians.
“When we consider next steps in tax reform, obviously issues around intergenerational equity are front and centre,” he said.
Independent MP Allegra Spender said the government’s tax package should address intergenerational inequity.
“But any increases in tax should be offset against income tax cuts for wage earners – Australians want the government to spend their money more wisely, not give the government more money,” she said.
Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.
