Treasurer Jim Chalmers is preparing to unveil a $28 billion upgrade to the federal budget next week, according to a leading expert, who says the government is still “rolling in money”.

Economist Chris Richardson’s widely read budget monitor report, published on Sunday night, reveals a huge lift in Commonwealth revenue from personal taxes amid low unemployment.

It has helped propel federal finances to an underlying cash surplus of $31.5 billion over the past 12 months, the analysis concluded, with the extra revenue more than offsetting a lift in spending.

But Richardson is cautioning Dr Chalmers against using the windfall for an election year cost-of-living cash splash, pointing to renewed fears about stubborn prices growth in the March quarter.

“The immediate problem is inflation,” he said.

“That’s hanging around a bit more than the Reserve Bank forecast, so markets now don’t expect a rate cut from the RBA until a year from now – after the federal election.

“But the government will desperately want at least one rate cut under its belt before going to the polls.

“So, with that risk hanging over it, the government will need to be careful with its extra spending in the budget.”

The budget monitor finds revenue will be $41 billion higher across 2023-24 to 2026-27, though spending is also growing faster than official estimates too and so the underlying position is $28 billion better off over the forward estimates.

Source: Chris Richardson.

Balancing spending and inflation

With all that money swirling around and an election coming up, there is speculation the government will look to deliver cost-of-living relief.

But Richardson is one of many economists taking aim at federal government claims that additional spending wouldn’t be inflationary – echoing the response to power bill subsidies last year.

“Yeah, nah,” he said.

“At its simplest, inflation is too many dollars chasing too little stuff – demand running ahead of supply.

“Yet every time there’s a new subsidy (such as Queensland’s recently announced $1000 electricity subsidy), that adds to demand, but it doesn’t add to supply.”

The outlook for inflation has become slightly gloomier over the past two weeks after hotter-than-expected March-quarter numbers dashed hopes that interest rate relief was coming soon.

The Reserve Bank will meet next week and give its latest update on the trajectory for prices as Chalmers seeks to tout the government’s commitment to lower inflation before the budget.

“We’ll try and land a second surplus in this budget. That’s an important way to put downward pressure on inflation,” Chalmers said last week.

“That first surplus that we delivered is part of the reason why inflation has moderated because of the responsible way that we’re managing the budget.

“We’ll continue to run a tight ship.”

Source: Chris Richardson

Longer-term pressures

Richardson says the federal government must adopt a longer-term approach to budget health that avoids trying to cash in politically on the short-term improvement in the financial position.

He warned of structural pressures, including rising spending on services like the NDIS and a massive loss in revenue due after the stage-three tax cuts come into force later this year.

“Election year coming or not, if the government does too much in this budget, it risks the oldest mistake in the budget – making permanent promises off the back of temporary good news,” Richardson said.