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Wednesday 22 May 2024 by Philip Brown

The Federal Budget 2024

We are approaching a consequential point for Federal finances and the macroeconomic backdrop. However, the real changes were set in motion in 2018, when the Stage 3 tax cuts were first legislated. Most other developments in the 2024 Budget are of decidedly modest importance in comparison.

Since our LOCK strategy was published in January, FIIG has been pointing to the impact of the Stage 3 tax cuts as highly material. The tax cuts are particularly noteworthy for having been flagged so far in advance (literally since 2018), but also for being entirely optional. Other macroeconomic events like COVID, the war in Ukraine, or the FOMC interest rate policy are imposed upon Australia. The tax cuts are our collective choice. At least conceptually, the new ALP government could have chosen to cancel them (though the politics of such a move would have difficult political consequences). The ALP government has altered the structure of the tax cuts to give more benefit to those lower down the income spectrum, but the fundamental macroeconomic point of a large slew of tax relief hitting the economy on 1 July 2024 was set in train in 2018.

That is the story of the 2024 budget: a decision taken in 2018.

As we continue through a discussion of the main elements of the budget, remember that the tax cuts – although old news – are worth AUD23bn per year.

The overall result from the budget for 2023-24 is a surplus of AUD9.3bn, but this drops to a deficit of AUD28.3bn in 2024-25. The main driver? There’s around AUD9.5bn of new policy announcements, but there’s also $AUD23bn of lost revenue via the tax cuts.

Unlike other parts of the budget where the government tends to report the total cost of a project by summing up the expenses in each year, the tax cuts are notably not given this treatment. It obscures how large the tax cuts are in comparison to other measures.

For example, the cost of the Future Made in Australia Policy is frequently reported as AUD22.7bn and indeed it is, if you sum the costs over the next 10 years. It doesn’t seem so important when set against the AUD23bn per year in tax relief. Future Made in Australia is an important policy, and it sets the scene for what is likely to be a thematic concept of life in Australia for decades to come. Climate change is now actively affecting Government policy in a material and short-term way. Although the policy is called “Future Made in Australia”, much like the US Inflation Reduction Act, a decent proportion of the policy is green manufacturing. There is AUD19.7bn allocated to “Making Australia a Renewable Energy Superpower”.

The AUD300 per household for utility bill relief has attracted a lot of headlines, despite its total cost of AUD3.5bn (combined total over 2024-25 and 2025-26). But at AUD3.5bn it is an order of magnitude less important than the tax cuts – though it does reach different people. There is also AUD325 for small businesses.

Similarly, the rent relief move attracted some headlines and often quoted as AUD1.9bn over the forward estimates, when in reality the effect is AUD384.3m in 2023-25 and around AUD500m per year thereafter (rising slowly over time). Again, we contrast the annual cost of the rental package (AUD500m per year) against the cost of the tax cuts (AUD 23bn per year). While important, both these relief packages are dwarfed by the tax cuts.

The utility bill and rental packages also serve to lower measured inflation. Inflation is a generalised concept that refers to the prices in the economy. The CPI, although often used as the definition of inflation, is actually the Consumer Price Index, and so only measures the prices paid by consumers in the economy. For both the rental relief package and the utility relief package the government is stepping in and bearing some of the costs and so the price paid by consumers falls. This will, mechanically, cause a fall in measured CPI even though the overall price level hasn’t changed much.

In of itself, these policies lower CPI without affecting inflation in a generalised sense. But that’s only the first step. The fall in CPI will serve to affect inflation expectations too. The reason the RBA is so interested in labour markets is because they don’t want a wage-price spiral developing. But if inflation expectations remain under control, that risk is significantly reduced. So lowering CPI and CPI expectations at this important juncture (just before the Fair Work Commission decides the wages for the coming year) does have some value.

The Budget news coverage focused on what was new – which was the Made in Australia Fund, the utility relief, and the rent relief. Meanwhile, the main news for the macroeconomy from here is the same as it’s been for years: what is in the impact of a major tax cut flagged multiple years in advance? We tend to think that it will support the economy and in particular the household side of the economy. While there are lots of economic theories about perfect foreknowledge and such things, the reality of day-to-day life for millions of Australians is much more about “how much is left in my back account a few days before payday?” On this score, the change in the tax rates effective 1 July is the biggest story from the budget.

The overall economy is clearly weakening. GDP has been poor for a while and the unemployment rate is rising. The extra stimulus from the tax cuts will hit at an opportune time. Large though the tax cuts are, they are unlikely to be able to overturn the impact of 425bp of rate rises delivered in this cycle. So we are expecting the flows from the tax cuts to extend the peak, but not change the fundamental direction for the economy.

From what we can see the RBA doesn’t want to raise rates again and the recent rise in the unemployment rate gives them the cover they need to sit pat a while longer. Unless there is a material surprise from inflation, the RBA will likely move to cutting rates either later this year or early next year. Our forecast remains for a rate cut in November as the most likely timing.