Federal Budget Frydenberg’s tightrope act amid federal budget pressures

Frydenberg’s tightrope act amid federal budget pressures

PM offers more hints about what's in Tuesday's federal budget

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Treasurer Josh Frydenberg will need to tread a careful path between politics and economics when he hands down his pre-election budget at a time of already heated inflation and a Reserve Bank waiting in the wings with a rate hike.

Tens of billions of dollars of spending have already been announced ahead of Mr Frydenberg’s fourth budget on Tuesday night – from infrastructure to health and from apprentices to national security.

But the federal government has remained tight-lipped on a much promised support package for households who are facing of cost of living pressures, particularly from a spike in petrol prices to above $2 a litre.

However, the measures are widely expected to include a temporary cut in the 44.2 cents per litre fuel excise.

The government insists its plan won’t fuel inflation and prompt an earlier increase in the cash rate by the RBA than would otherwise be the case.

“This is a very carefully calibrated budget against an uncertain environment,” Finance Minister Simon Birmingham said in Canberra on Monday.

He said the government would build on its track record of responding to temporary shocks to the economy with temporary, targeted support.

But Opposition Leader Anthony Albanese said this was a desperate government fighting for itself, not for the interests of Australians.

“They are now throwing money at issues without a plan to grow the economy,” he said.

The budget comes with annual inflation already at 3.5 per cent and destined to head sharply higher, raising speculation in financial markets that the RBA could hike its cash rate as early as June.

Some economists believe cutting the fuel excise will be a waste and that any reduction would be quickly gobbled up in a volatile oil market triggered by the war in Ukraine.

But Senator Birmingham dismissed such suggestions.

“It is easy sometimes for economists or others in a theoretical landscape to say what does or doesn’t make a difference,” he said.

He said he was hearing clearly from Australians that the impact from the events in Ukraine was hurting their budgets.

Deputy Prime Minister and Nationals leader Barnaby Joyce had argued for weeks against cutting fuel excise because it helps pay for roads.

“I’ll leave that to the Treasurer. Obviously, cost of living is central and this is the decision they have decided to make,” he said.

Economists expect that, alongside an upgrade in inflation forecasts, the budget will also show stronger growth and wages predictions, and an unemployment rate that is projected to be well entrenched below 4 per cent.

The budget bottom line is also expected to be much improved due to a stronger-than-expected economy, a falling unemployment rate to historic lows and a commodity price boom as the result of the Russia-Ukraine war.

Economists are expecting an underlying budget deficit of between $70 billion and $80 billion for the 2021/22 financial year, compared with the $99.2 billion shortfall predicted in December’s mid-year review and the $106.6 billion at the time of last year’s May budget.

Even so, BetaShares chief economist David Bassenese said much of the revenue windfall looked set to be spent rather than saved, despite a still yawning budget deficit.

“This will only bolster the nearer-term economic outlook and adds to upward pressure on local interest rates,” he said.

“It also again highlights that fiscal austerity is a distant memory. If a government can’t tighten the budget in today’s booming economic times, it never will.”