The Federal Government has unveiled a series of key proposals and economic measures, aiming to address cost-of-living pressures, support small businesses, and enhance social security benefits. Notably, these initiatives come as the government is on track to deliver a budget surplus for the second consecutive year, a significant milestone in the context of the Reserve Bank of Australia’s (RBA) ongoing efforts to manage inflation.
Key Proposals
- Revised Stage 3 Tax Cuts: Set to take effect from 1 July 2024, these cuts are designed to provide tax savings for individuals, aiming to alleviate financial pressures on households.
- Energy Bill Relief: Households can expect savings of up to $300, while eligible small businesses will receive up to $325 in energy bill relief. This measure targets immediate cost-of-living concerns, particularly in the face of rising utility costs.
- Instant Asset Write-Off Extension: The $20,000 instant asset write-off threshold for eligible small businesses will be extended for another year, until 30 June 2025. This extension aims to support small business investment and growth.
- Superannuation Guarantee on Paid Parental Leave: Starting 1 July 2025, the Superannuation Guarantee will be paid on Paid Parental Leave, enhancing financial security for parents during leave periods.
- Social Security Deeming Rates Freeze: The freeze on social security deeming rates for financial investments will continue until 30 June 2025, benefiting those reliant on social security.
- Commonwealth Rent Assistance Increase: The maximum Commonwealth Rent Assistance will see a 10% increase, providing additional support to renters.
Economic Outlook and Budget Implications
The government’s budget projections indicate a surplus of $9.3 billion for FY24, a significant improvement from the previously forecast deficit of $1.1 billion in the Mid-Year Economic and Fiscal Outlook (MYEFO). However, the longer-term outlook presents challenges, with expected deficits of $28.3 billion in FY25 and $42.8 billion in FY26. These deficits reflect ongoing structural spending pressures in areas such as the National Disability Insurance Scheme (NDIS), defense, aged care, and health.
Despite the immediate surplus, the financial markets have shown limited reaction, as many new spending initiatives and tax cuts were anticipated. Moreover, future deficits are relatively modest in relation to the gross domestic product (GDP).
Inflation and Growth Forecasts
The budget forecasts a gradual slowing of inflation, with an expected rate of 3.5% by the end of FY24, and 2.75% by the end of FY25. This is slightly more optimistic than the RBA’s forecasts of 3.8% and 3.2% for the same periods, respectively. The temporary extension of the electricity rebate is expected to contribute to this lower inflation rate by reducing it by 0.5 percentage points. However, underlying inflation concerns remain, particularly regarding capacity utilization.
GDP growth is projected to be 2.0% in FY25, slightly below the RBA’s forecast of 2.1%. Previous budget forecasts have consistently underestimated the terms of trade, which have been more favorable than expected, aiding the budget position. However, a 7.75% decline in the terms of trade is anticipated in FY25.
Impact on Consumer Spending and the Labour Market
The government’s short-term initiatives, including tax cuts, energy rebates, and increased rental assistance, are unlikely to drive a sustained increase in consumer spending. Instead, spending is expected to focus on non-discretionary items such as food and essential services. A portion of the tax cuts is also likely to be saved rather than spent.
Although the broadened Stage 3 tax cuts are significant, they are not expected to have a substantial impact on inflation. The RBA’s primary objective remains balancing the labor market. While progress has been made, further efforts are needed, indicating that immediate interest rate cuts are not anticipated.
Conclusion
The Federal Government’s latest budget proposals and economic measures reflect a balanced approach to addressing immediate financial pressures while managing long-term structural challenges. The projected budget surplus for FY24 marks a positive development, but future deficits highlight ongoing fiscal pressures. The measures introduced are expected to provide relief to households and small businesses, albeit with limited long-term impact on broader economic growth and inflation.
