The Albanese Government‘s first budget is a movable feast so full of provisos and asterisks that it should prove accurate no matter what happens.
What this obscures is the key role irresponsible policy has played in the falling living standard embedded in the outlook.
There are two major dimensions to this fall. The first is strong inflation and weak wages.
Wages are forecast to average 3.75 per cent growth over the next two years – 22/23 and 23/24 – when in truth leading indicators are already rolling over well short of this number.
Inflation is forecast to be much higher in 2022/23 at 5.75 per cent meaning real incomes fall 2 per cent. The heroic assumption for 2023/24 inflation is a 3.5 per cent CPI, conveniently lifting real incomes marginally.
At the same time, immigration is expected to surge but nowhere near as high as inflows currently suggest, which will clearly lift inflation via rents and demand, while squashing wage growth lower than the budget outlooks assumes.
Per capita GDP growth to plunge near recession
Australia’s real gross domestic product (GDP) growth is projected to fall from 3.9 per cent in 2021-22 to 3.25 per cent in 2022-23 and just 1.5 per cent in 2023-24.
This comes as population growth is forecast to accelerate from 1.1 per cent in 2021-22 to 1.4 per cent in both 2022-23 and 2023-24 off the back of an increase in net overseas migration (NOM) to 235,000 a year:
Assuming this population growth forecast comes to fruition, Australia’s GDP per capita will fall from a solid 2.8 per cent in 2021-22 to 1.85 per cent in 2022-23 and just 0.1 per cent in 2023-24.
So, by 2023-24, Australia will be on the verge of another per capita recession, whereby every Australian’s share of the nation’s economic pie remains stagnant, and the economy is only growing because of strong immigration-fuelled population growth.
Such an economy was a feature for much of last decade, with Australia‘s real per capita GDP growth tracking at an abysmal 1 per cent rate per annum from 2014.
But the Budget’s 235,000 NOM forecast looks severely understated given the Albanese Government has committed to the largest temporary and permanent migration intakes in this nation’s history by:
– Raising the permanent non-humanitarian migrant intake by 30,000 to a record high 195,000 a year
– Accelerating temporary migration by expanding work rights for international students via uncapping the number of hours international students can work while studying for an additional year, and extending the length of post-study work visas by two years on ‘skills shortage’ courses. All this while committing to clear the backlog of nearly one million visas awaiting approval.
NOM already hit its highest level on record in the March quarter, with 96,200 quarterly net arrivals.
And analysis of higher frequency monthly visa data by Coolabah Capital shows that international student arrivals exceeded pre-pandemic levels in the first half of 2022 and rocketed to 500,000 on an annualised basis in the September quarter, with work visas also accelerating:
Energy shock
On top of unrealistic wages growth, the Budget‘s outlook for energy inflation is optimistic, to say the least.
“Consumer price inflation is forecast to peak at 7¾ per cent in the December quarter of 2022, the same peak as at the July Ministerial Statement, but high inflation is now expected to persist for longer than previously expected largely due to the pass-through of higher energy prices to household bills.,” the Budget says.
“Electricity and gas prices are expected to directly contribute ¾ of a percentage point and 1 percentage point to inflation in 2022–23 and 2023–24, respectively.
“Inflation is expected to ease gradually to 3½ per cent by June 2024 as global supply-side pressures moderate and tighter monetary policy weighs on demand. Thereafter inflation is expected to fall back within the target band.”
Current energy inflation embedded in National Electricity Market and futures is roughly double that level.
If the Budget took its energy inflation benchmarks from markets then it would need to double the contribution to the CPI and real incomes would consequently fall more heavily in 2022/23 and still be negative in 2023/24.
In short, the Treasury is using hopeful forecasts to save the Albanese Government‘s blushes for failing to address the energy crisis at its source.
The fact is, if realistic assumptions for energy inflation and wage disinflation were plugged into the Budget, then it would paint a much more dim picture of Albanese Government policymaking for workers.
Indeed, if the Treasury used the same assumptions as the Reserve Bank of Australia then Treasurer Jim Chalmers would be responsible for the largest fall in Australian living standards in modern history.
That appears to be too bitter a pill for Treasury to swallow.
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