Is The New Budget Going To Be Inflationary?

Published by Otto Dargan on May 12, 2023

The 2023-24 Australian federal budget has sparked a debate about whether it will cause inflation to rise or fall. The government’s $21 billion economic relief package focuses on relieving the high cost of living, promoting affordable housing, improving healthcare, and providing clean-energy incentives. While the government believes its cost-of-living package will ease inflation pressures, some experts say the spending raises the chances of stubborn inflation.

Home Loan Experts CEO Alan Hemmings says the budget makes more RBA rate hikes more likely.

“I will preface this by saying I am not an economist,” Hemmings said. “Whether people agree or not with the increases to JobSeeker, rental assistance, the single parent payment, and increased wages for healthcare workers, the effect is that people will have more money to spend. Add to that the increase in migration, which will further fuel spending. And the introduction of the scheme to make houses green, which will fuel spending as well.

“The only areas in the budget that help tackle inflation are the increased tariffs on cigarettes and vaping and the increase in the ‘departure tax’ for people flying overseas.

“All of this may force the RBA’s hand with further interest rate increases.”

Some industry analysts shared similar views. David Bassanese, the Chief Economist at BetaShares, thinks the predicted economic growth outlined in the budget could provide justification for the RBA to raise interest rates, possibly once.

And Goldman Sachs has stated that the increase in household incomes as a result of the budget is “incrementally hawkish” and has forecast a possible rate increase in July. The investment bank has also cautioned that there may be even more rate increases in the future. Goldman Sachs Australia’s chief economist, Andrew Boak, stated that due to the surge in population resulting from migration and the recent rise in house prices, the RBA is now more likely to implement further policy tightening in the coming months.

Home Loan Experts senior mortgage broker Jonathan Preston was less convinced because of where most of the benefits are targeted.

“They are really giving money only to lower-income households at this stage, so I don’t think the impact will be very inflationary,” he said.

Economists from AMP and Commonwealth Bank also did not expect the budget to have any effect on inflation. Also, JPMorgan estimated that the proposed support measures would contribute only 0.3 percentage points to economic growth and would not pose any additional challenges for the RBA.

How Does This Impact A First-home Buyer Or A Property Investor?

Home Loan Experts founder Otto Dargan added that further rate rises hold real danger for homeowners, investors and the economy.

“If interest rates were to go to 4.1%, then it’s likely we would see high numbers of borrowers in trouble, especially those who borrowed when rates were low in the last few years, and younger people, who tend to borrow close to their limit to enter the market,” Dargan explained.

“The zoomed-out view of our economy looks strong, as many borrowers have savings and can handle another increase. However, when we look at homeowners, there are many who are past breaking point already and will need to make tough decisions if rates rise again. Investors are better insulated than homeowners, as they receive negative gearing benefits and rents have increased in the last year, yet those with multiple properties may find themselves stretched to their limit.”

The consensus among experts is that further interest rate increases would pose a significant risk to homeowners, investors and the wider economy, with many borrowers already struggling to make ends meet. As the economy continues to navigate the challenges of inflation, it will be important to monitor the impact of the budget on the housing market and the broader economy.

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