Federal budget to get major windfall from high prices hitting Australian households

Australia’s budget is likely to come in $11bn stronger than previously forecasted as bad news for households is often good news for Treasury. Ahead of Tuesday’s federal budget, Oxford Economics Australia predicts the budget has strengthened over the past six months purely due to higher commodity prices and inflation. Oxford Economics Australia head of economic research and global trade Harry Murphy Cruise told NewsWire term the federal government is benefiting from “the cost-of-living crunch” over the short-term. “All the bad things for households and budgets actually help the (federal ) budget in many respects,” Mr Murphy Cruise said. “Higher inflation and higher commodity prices both improve the tax take and that is why for this financial year we are expecting the budget to improve.” But Mr Murphy-Cruise noted this was only a temporary sugar hit and was unlikely to benefit the national coffers over the longer term. The Australian budget is benefiting from soaring oil prices over the two months since the US/Israel and Iran war began on February 28. In January oil prices were about $US56 ($A80) per barrel, but temporarily touched $US120 (A$167) per barrel before sliding back down towards $US100 ($A138) a barrel. For every $10 increase in the price of oil, Australians pay an extra 10 cents at the fuel pump. Surging fuel prices has also largely lifted Australia’s inflation rate which leapt to 4.6 per cent in March from 3.7 per cent in February. Mr Murphy Cruise said the government benefited from higher commodities and inflation through higher royalties, company profits on mining tax, and higher prices for goods and services get captured through the GST and consumption taxes. Oxford Economics Australia says in addition to rising fuel costs, other commodities – including iron ore – have come in higher than forecast, giving the budget an $11.4bn over the current financial year. It will also continue to improve over the next four years, with an estimated savings of $71bn largely due to the current lift in commodity prices. According to the Australian Office of Financial Management, national gross debt as of May 8 was $964.2bn. Meanwhile, net debt according to Mid-Year Economic and Fiscal Outlook showed net debt – which is gross debt minus the government’s cash, investments and loans – came in at $587.5bn. Despite the budget windfall, there was unlikely to be a surplus over the four year period. Growth tipped to stall While higher oil prices will temporarily help the Australian budget, it will come at the expense of slowing gross domestic product. In a grim forecast, the Reserve Bank of Australia’s economic base case is a slowing economy by half a percentage point weaker in 2026, to just 1.3 per cent, compared to its previous predictions in February. Headline inflation this calendar year will be four per cent, up from an earlier estimate of 3.6 per cent. The RBA also modelled two adverse scenarios – both based on a prolonged US and Iran war – with underlying inflation could peak closer to 5.2 per cent, while the unemployment rate would jump to 5.1 per cent due to slowing economic activity. Gross domestic product is also expected to stall under the more adverse scenarios although the RBA is not predicting a recession. Under both these adverse scenarios, the critical Strait of Hormuz – where around 20 per cent of the world’s oil passes through – remains shut leading to a “very sharp” near term rise in energy prices. Despite the US and Iran war, the Reserve Bank still predicts inflation to return to the midpoint between 2 and 3 per cent by June 2027. “Developments in the Middle East remain highly uncertain but under a wide range of possible scenarios the conflict adds to global and domestic inflation,” Ms Bullock said. “The shock to oil and some other commodity prices has worsened the trade-off between inflation and growth.” Between a rock and a hard place Even though household budgets are under pressure, the federal government is being urged to avoid splashing the cash and helping relieve some of the financial stress. Instead AMP chief economist Shane Oliver is calling for a massive reduction in spending to help ease cost-of-living pressures on households. “My wishlist is that any stimulus from the government is limited, well-targeted towards businesses and households that need it,” Mr Oliver previously told NewsWire. “It also needs to be temporary and modest because if you pump too much stimulus in you’re just going to make the Reserve Bank’s inflation challenge worse and higher interest rates.” He said any cost-of-living relief should be modest at about $5bn or 0.2 per cent of gross domestic product. He also said Australia needed to find $100bn over the next four years in savings to the budget. Australian government spending is estimated to come in at 26.9 per cent of the country’s GDP. “Over a four-year period, it would be nearly a 2 per cent GDP reduction, taking government spending back to around its long-term average level,” Mr Oliver said. “It might sound harsh but the problem is all this government spending has increased the level of aggregate demand in the economy and left little room in home construction, business investment and consumer spending, which has just created an inflation problem that shouldn’t have been there.”