Treasurer Jim Chalmers flags tax reform, spending cuts amid inflation concerns
Updated ,first published
The spending cuts will sit alongside proposals to get the economy growing faster and a plan for further tax reform in the May federal budget, as Chancellor of the Exchequer Jim Chalmers seeks to push back against growing claims that government spending is contributing to inflation.
The coalition accused Chalmers of not understanding the economy and the government’s impact on it, while the treasurer announced on Sunday that the May 12 budget would have a separate set of spending measures.
Chalmers has been pressed on the contribution of government spending to the bank’s decision since the Federal Reserve raised official interest rates last week and financial markets expected at least one more increase by June.
Inflation rose to 3.8 percent in December, and the Central Bank predicts inflation will reach 4.2 percent by mid-year. In his budget update, Chalmers predicts inflation will reach 3.75 percent by June.
Pressed on the state of the budget, which Chalmers predicts will run a $36.8 billion deficit this fiscal year and then a $34.3 billion deficit in 2026-27, the treasurer said spending cuts, productivity reform and tax would be key elements of the document.
“The budget will be about productivity. We are working on a productivity package,” he told the ABC. insider program. “There will be a savings package we are working on. [And] We will evaluate whether further steps can be taken regarding tax reform.
“But overall, it’s all going to be about removing the speed limit on the economy, making sure we can grow faster with lower inflation, attracting investment, dealing with generational issues, and also continuing to get the budget into better shape.”
The opposition and many economists said government spending was hindering the Central Bank’s job of controlling inflation. On Friday, RBA governor Michele Bullock admitted that public and private spending were contributing to very fast-growing aggregate demand.
Chalmers said on his byline that the government had saved more than $114 billion since he took office and was on track to increase the budget by $233.5 billion by 2028-29. He said almost $40 billion of the increase in spending since 2022-23 is effectively “automatic” changes such as support for veterans and retirees, as well as an increase in natural disaster aid.
While real expenditures increased by 3.2 percent in the last three years, the economy grew by 6.3 percent.
But shadow treasurer Ted O’Brien said public demand rose by 1.2 per cent in the September quarter, more than the private sector figure of 1.1 per cent. He said the government disproportionately affects aggregate demand and inflation across the economy as public spending grows faster than private spending.
“If the treasurer doesn’t understand the problem, then he can’t be trusted to fix it,” he said.
“Ultimately, at a time when families are struggling with higher mortgage repayments and the cost of living, the government needs to help ease the pressure on the economy, not increase it.”
National accounts for September showed federal government spending rose 0.5 per cent in the quarter by $412 million to $75.5 billion. The Bureau of Statistics said much of the increase was driven by Medicare and pharmaceuticals, both of which are heavily driven by consumer demand. The government spent another $6.1 billion on capital works, a 5 percent increase of $313 million.
State and local government spending increased 1 percent, or $828 million, to $82.2 billion. States and local councils spent another $20 billion on capital works; This means an increase of 1.4 percent or $266 million.
During the same period, household expenditures increased by $1.8 billion (0.5%) to almost $354 billion, while business investments increased by 3.2 percent, or $2.5 billion, to $82.3 billion. Total GDP for the quarter was a record $688 billion.
This imprint revealed last week that the government was considering replacing the 50 per cent concession on capital gains tax as part of a wider tax package.
Chalmers declined to be asked whether the government would introduce the concession, which many economists say increased pressure on house prices when it was introduced by the Howard government in 1999. But Chalmers said any tax reform would take into account how the tax system could harm young Australians.
“As we consider the next steps in tax reform, it is clear that issues around generational equity are front and center,” he said.
Independent MP Allegra Harcama said the government’s tax package should address intergenerational inequality.
“But any increase in tax must be offset by income tax cuts for wage earners; Australians want the government to spend their money more wisely, not give the government more money,” he said.
Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
