Interest rates, inflation: Cash handouts would have raised rates, treasury data reveals

Home Politics Interest rates, inflation: Cash handouts would have raised rates, treasury data reveals
Interest rates, inflation: Cash handouts would have raised rates, treasury data reveals

One-off cost-of-living measures would have added an extra half a per cent to skyrocketing inflation, driving interest rates even higher.

That’s according to the latest modelling by the Treasury, who say while the federal budget is projected to be $114 billion better off over the coming four years, nearly all that money will be spent on paying down debt.

Treasurer Jim Chalmers said the October budget returned $114b of tax upgrades to the budget over the forward estimates, thanks to high commodity prices and low unemployment.

He said the government will return 99 per cent of the upward revisions for the next two years, and 92 per cent over the forward estimates.

He says this will not cause any further inflationary pressures and will keep Australia’s economy strong.

“The budget was carefully calibrated to deal with the inflation challenge in our economy,” he said.

“If we had spent all the extra revenue it would have caused more pain in the long run for Australian households and for the economy.

“Our budget doesn’t add to inflationary pressures in our economy, (it) makes responsible savings, and provides targeted cost-of-living relief with an economic dividend.”

Dr Chalmers said the more than 90 per cent return was well above previous governments, notable in comparison to the Howard-Costello average of around 30 per cent, and the previous government’s average of around 40 per cent.

Inflation is currently up 7.3 per cent from a year ago, the highest rate in 32 years.

In an attempt to drive down inflation, the Reserve Bank of Australia has hiked the interest rate from 0.1 per cent to 2.85 within seven months.

Treasury modelling has found if the government had instead pledged a lower return, and used some of the money to dish out one-off payments, for example, it would have worsened the economy.

The modelling indicates such measures would have prompted an increase in the consumer price index to around 6.25 per cent in the year to June 2023, rather than the 5.75 per cent on which the October budget was based.

This likely would have caused the Reserve Bank to hike the cash rate to peak at 4.75 per cent in June 2023, rather than the 3.35 per cent assumed in the budget.

Such an increase would have added around $440 a month to a $500,000 mortgage.

“We know we had to act differently from our predecessors to avoid making the inflation problem in our economy worse, and forcing the RBA to go even harder on interest rates,” Dr Chalmers said.

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