The global economy’s prospects have deteriorated dramatically since the April Pre-election Economic and Fiscal Outlook (PEFO).
The likelihood of major industrialised countries entering a recession in the near future is growing, and China’s development outside of the pandemic is likely to be the slowest in more than 30 years. Dr Steven Kennedy, the Treasury Secretary, released a statement warning that the slowing of consumption growth will be worsened further by diminishing household wealth due to continuous, predicted reductions in housing values.
The impact of pandemic activity restrictions is still being felt, albeit the 612 per cent increase in consumption in 2022-2023 is expected to be relatively transitory, owing primarily to the sustained recovery in services spending and travel abroad. The services-driven recovery is expected to slow by early 2023, with consumption growth falling to 11 per cent in 2023-2024.
Furthermore, as more mortgages exit fixed-rate periods, more households will experience the effects of higher interest rates on their budgets.
“Workers at the lower end of the income distribution are expected to be impacted most sharply by the rising cost of essentials, as the cost of food, housing and energy make up a larger share of their spending, Dr Kennedy said.
“With prices set to grow faster than wages for a period, indexation of pensions will continue to be linked to growth in consumer prices rather than benchmarked against male total average weekly earnings.
Furthermore, it is predicted that inflation will reach a peak of 73.4 per cent by December 2022 before progressively decreasing to 31.2 per cent by June 2024.
“While this peak remains the same as the profile prepared for the July Ministerial statement, high inflation is expected to persist for longer than previously expected, largely due to the pass-through of higher energy prices to household bills.
“Electricity and gas prices are expected to directly contribute ¾ percentage points to inflation in 2022–23 and 1 percentage point in 2023–24. This assumes consumer electricity prices will increase by an average of 20 per cent nationally in this financial year and 30 per cent next year.”
Without the subsidy programmes, data from the ABS released the day after the Budget shows that energy costs would have risen by about 16 per cent in the third quarter of this year. The increase in pricing this fiscal year is attributable to market dynamics and increases in default market offer published by the Australian Energy Regulator (AER) in May. Wholesale gas prices on the east coast remain more than double their pre-Russian invasion of Ukraine norm, while wholesale power prices have nearly tripled this year over last.
At the same time, domestic weather events and supply constraints, combined with strong demand in residential construction and consumer goods, are contributing further to generalised price growth.
The way ahead
According to the statement, the fiscal position’s near-term prognosis has improved following PEFO, with the underlying cash deficit falling by $41.1 billion in 2022-2023 and $12.5 billion in 2023-2024. Future projections show a decrease in gross and net debt each year. The cost of sending payments has risen due to higher-than-expected inflation. Payments have increased by $92.2 billion over four years, excluding the new policy.
A third ($34.1 billion over four years) reflects increased payment indexation. On September 20, the most current indexation of income support payments occurred, representing the greatest indexation rise for pensions and allowances in 30 years.
Higher inflation will continue to materially increase payments in the subsequent six-monthly indexation updates (March and September) until inflation returns to the RBA’s target range. Payments will then stabilise at a proportionally higher level.