Back in Surplus and Inflation Reducing – The Budget Magic Trick

We’re back in surplus – but don’t be fooled, this is just monetised inflation via tax taken from your pocket. This is not fiscal constraint this ‘tax windfall’ is financed through record inflation passed on to households through record unconstrained, uncontrolled energy pricing and insurance costs and therefore higher company tax rates. Due to this lack of constraint the RBA – with their hands tied and their one blunt object of interest rate increases to moderate inflation, the budget may have dealt another financial blow meaning interest rates keep rising.

Inflation Magic Trick

Part of the budget forecasting now sees the Australian Government trim the projected inflation rate by around 0.5%, currently the RBA sees this sitting at 3.8% (higher for longer) before tempering over 2025. But the government in political slight-of-hand has given out subsidies for all households for energy and some for rent assistance, the 2 highest areas of inflation over the last 3 years (and the Labor government term). This is likely to make for inflation in the long term as the root cause was not dealt with, just a magic trick. The government solution to manipulate inflation rather than deal with the government led root causes does not deal with the 2 endemic problems the government created – monopolistic behaviours of our energy companies and unconstrained migration lifting house prices. Why would they not want to deal with these? Any reduction in profits garnered by companies means less tax and any drop on house prices means less stamp duty (yes, another tax).

Energy Prices in Graphs

Let’s start with energy – and one of my favourite topics. The Ukraine war lifted energy prices. Russia turned off the gas tap (and then someone ‘Its Russia’ – not Russia) blew up another tap Nordstream 2. This lifted gas prices and in turn energy prices as the overexcited, overextended and over projected green energy revolution proved it wasn’t a revolution but rather a poorly executed science hypothesis (I thought about using the word experiment but that involves a more thought-out outcome). As Germany turned off nuclear, gas became scarce in Europe and prices rocketed. So much so that Australia – the land of energy (green and ground) suddenly started facing energy shortages. In 2004 – we had some of the cheapest energy in the world, now we have some of the most expensive – what happened between now and then? We privatised a monopoly for greater ‘efficiency’ but learnt the hard way businesses like to make money, government like them to make money as they get to tax them, and the consumer is left with another ‘covert tax’.

The U.S. now pays under $2USD/GJ from a peak Ukraine war of around $10USD/GJ.

Australia currently according to the Australian Energy Market Operator gas pricing – is paying $8USD/GJ from a peak capped of $9.5USd/GJ. Pre Ukarine war we were paying $4USD/GJ. Funny isn’t it when you put price cap in place, the cap acts like a price magnet not cap (just like the US debt ‘ceiling’). Australia is now paying more for gas than the Ukraine war (double) and the US is paying half.

 Interestingly the U.S. is now a bigger gas exporter than Australia – but we still rank 2^nd in the world. The difference – monopolies and government controls (not fake caps).

In this budget you are now being given a $300 credit – but what has the government and energy corporations taken from you in inflation – a lot more - this is just a tax rebate not a credit.

House Prices, Stamp Duty and ‘Rental Assistance’

The Governments next budget magic trick is ‘rental assistance’ another ‘gift’ to reduce inflation whilst ensuring they don’t record a ‘real’ recession (just a GDP per capita recession) by allowing for mass immigration and out of control house price increases. With 1 million people receiving rental assistance they will now receive an extra 10% ($70 per fortnight). With rent going up 7.8% last year (according to CPI and not the real world) this assistance also helps reduce ‘housing inflation’

Ultimately, this household budget gift is just another ‘tax rebate’ with states reaping record stamp duty and a ‘plan to build houses’ that far from deals with the reality of ‘ability to build houses’.

With a 5-year plan of building 1.2 million houses (240,000 per year) – but record construction in December 2021 of 240,000 per year now declining to 220,000.

And dwelling commenced halving since 2021, we’d suggest the plan is actually a ‘dream’ and with migration hitting 528,000 in 2023 prices and possibly interest rates will only head north driving inflation.

Record Spending

Taxation revenue for all levels of government as a percentage of GDP has grown from 27% in 2013 to 29.5% in 2023. The government expects to spend $726.7billion next financial year – up 6.4% whilst forecasting inflation to fall to 2-3%. Within this, NDIS is growing an estimated 8%. Although NDIS is an admirable cause, it has become somewhat of a ‘grey’ category and bandwagon with a new business opening and rags to riches stories enticing every man and their dog to jump on– not seen since the last vocation spending disaster.

Making the observation – government spending got us into this interest rate, inflation mess. To temper inflation, you probably want government spending below the target inflation rate – double does not bode well for the rest of the economy.

RBA boss Michelle Bollock recently made the observation ‘They (the government) want to help us beat inflation so they don’t want to try to add to inflationary pressures, but we will have to see what the budget comes out like.’ – Oops.

If they want to spend at a rate higher than their forecast inflation – that can only mean businesses and households will do worse.

Despite 2 surpluses – mainly on the back of record iron ore and coal prices - in 2026 Australia falls back into deficits. The spending is so high as a percentage of GDP, aside from Covid, spending has not been this high since mid-1980s (remember that period – record inflation – record interest rates). Doesn’t sound inflation beating does it?

Australian Budget Sunset

Whilst this budget supposedly helps fight inflation and gives us a second year of surplus (not seen since Costello), the real data suggests prolonged deficits and ingrained inflation. What could have been a budget of financial constraint to control spending and moderate inflation, government controls to fight monopolies and moderated migration to allow for a catch up on home building, is in fact the opposite and dooms Australia to further fall down the OECD rankings of disposable income, whilst ensuring inflation stays higher for longer into the sunset of the Australian dream.