Interest rates

Budget cuts needed to reduce pressure on interest rates

“We lay the entire burden of the adjustment on the Reserve Bank,” Mr Richardson said.

“Being able to keep unemployment levels very low and avoid an explosion in inflation requires all the arms of politics.

Chris Richardson, partner at Deloitte Access Economics. Alex Ellinghausen/Fairfax Media

“We need to change fiscal policy to bring the budget closer to balance in a ten-year, five-year plan.”

Federal government spending in 2023 — more than three years after the pandemic hit — is projected by the Treasury to be $60 billion a year or 3% of GDP higher than before the pandemic.

Treasurer Josh Frydenberg said on Monday it was time to “draw clear lines in the sand” on government spending, while Prime Minister Scott Morrison linked the budget to inflation and interest rates. ‘interest.

But the government is still unveiling $16 billion in “decisions taken but not yet announced” contained in the mid-year budget in December.

Ahead of the March 29 budget, he faces a decision to extend an $8 billion “temporary” tax refund for low- and middle-income earners for a fifth consecutive year, a stimulus that would increase the fuel consumption spending in the middle of this year when the RBA expects core inflation to hit 3.25%, above target.

Economics chief Peter Downes said with low unemployment and high prices for iron ore, gas and coal exports, politicians must refocus on the charter of budget honesty from former Treasurer Peter Costello to balance the books on the business cycle.

“As we move out of zero interest rates, it is prudent that fiscal policy plays a role in restraining growth – which is very difficult for a pre-election budget – and in reducing the risk that the cash rate of the RBA has to go very high,” says Downes.

“One of the risks to our small open economy with free capital flows is that the global bond market will push our long-term interest rates much higher, which is fueling all asset valuations, including our market. housing.”

There were also intergenerational equity issues to consider in taking on more debt for future taxpayers to repay, he said.

“With a short-term election cycle, there is a temptation to inflate the economy and sacrifice the well-being of future generations for the well-being of current generations,” Mr Downes said.

According to RBA forecasts, the current unemployment rate of 4.2% is expected to fall to 3.75% by the end of 2022 and remain at the lowest level since the 1970s.

That’s more than a percentage point lower than before the pandemic, which Mr. Downes says should improve the fiscal balance by at least $20 billion thanks to higher tax revenues and lower social spending.

The government originally planned to start active fiscal repair when unemployment was 5%, but revised the fiscal task to around 4% and now appears to be waiting until after the election.

Chief macroeconomic economist Stephen Anthony said the budget had become ‘unmoored’ and a post-election audit commission was needed to question spending and tax breaks such as capital gains and the negative gear.

“We need both sides of politics to make the elections more about these substantive issues,” Mr Anthony said.

In New Zealand last week, the Organization for Economic Co-operation and Development warned the Ardern government to tighten its budget to contain 30-year high inflation of 5.9%, which jumped with a low unemployment rate of 3.2%.

The RBA’s preferred measure of core inflation is a more moderate rate of 2.6% and Australia’s unemployment and wage growth are weaker.