Australia's FY24 budget: addressing inflation and relief

Federal treasurer Jim Chalmers will deliver the annual budget for FY24 on Tuesday, May 14, at 7.30pm AEST. This will be the Labor government's third budget since winning power in May 2022.

In financial markets, a key question is whether the budget will contribute to Australia's inflation problem or be part of the solution. Specifically, can the government utilise its strong fiscal position to strike the right balance between providing cost-of-living relief without inflaming sticky inflation? Failure to do so could backfire spectacularly if the budget inflames inflation, and the RBA is forced to raise rates before the next federal elections in 2025.

What is expected from the budget?

A budget surplus

The government is expected to announce a budget surplus of around $12bn this financial year, a significant turnaround from its December update of a deficit of—$1 bn.

The fiscal turnaround has been driven by surging tax revenues from high commodity prices, a tight labour market lifting tax payments and reducing welfare payments, and firmer-than-expected immigration. The budget is then expected to return to a deficit of—$15 bn in the following year.

Key initiatives

• Tax cuts for all Australian taxpayers from July 1st. These tax cuts have already been legislated and are estimated by some to be the equivalent of around three 25 basis points (bp) interest rate cuts.
• Wiping student debts.
• More funding for Child, Health, and aged care.
• Increased defence spending.
• Increased infrastructure spending.
• Increased spending on housing.
• Power bill and rent relief.
• Measures to promote women's economic security.
• Policies to support key industries as part of Future Made in Australia include producing solar panels, rare earths, and other critical minerals, including nickel.

Implications for markets.

Reports in today's media suggest the government expects its cost-of-living relief measures to be announced in the budget, including rent and power bill relief, to help inflation return to the RBA's 2-3% target by Christmas.

We don't necessarily agree with this view as the freeing up of money in one area often emerges elsewhere. Ahead of the budget, the rates market is pricing in 4bp of RBA rate hikes by September, which suggests the rates market isn't buying into the governments rationale either.

ASX 200 30 day interbank futures implied yields curve

• ^{Source: Tradingview. The figures stated are as of 13 May 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}