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The Guardian - AU
The Guardian - AU
Business
Peter Hannam Economics correspondent

Labor could raise welfare payments for cost-of-living relief without stoking inflation, economists say

Shoppers are seen during Boxing Day sales in Sydney.
Shoppers during Boxing Day sales in Sydney in December. Households and businesses have been squeezed by 13 interest rate hikes by the RBA since May 2022. Photograph: Steven Saphore/AAP

Addressing competition issues and increasing unemployment benefits and pensions are ways the Albanese government could tackle cost-of-living pressures but they would have to be coupled with savings to avoid reigniting inflation, economists say.

The prime minister, Anthony Albanese, on Wednesday said he had asked Treasury and the finance department to develop “further propositions” for providing cost-of-living relief by the May budget.

“[What] are the measures that can take pressure off families on cost-of-living without putting pressure on inflation. That’s the key issue here,” Albanese said in Sydney at his first press conference for 2024.

“If you were just to distribute additional cash to people, you potentially make inflation worse and therefore don’t help to solve the problem.”

Australia’s consumer price inflation rate peaked in December 2022 at 8.4% and has generally trended down ever since, reaching 4.9% last October. Households and businesses have been squeezed by 13 interest rate rises by the Reserve Bank during the current tightening cycle that began in May 2022.

Pressure for more relief is likely to mount as the government’s own finances remain robust in the short term at least, with the strong chance of a second consecutive budget surplus this fiscal year. Cost-of-living support is already about $23bn.

The challenge for the government, though, is there are few measures it can take that will have immediate effect and the ones it implemented in 2023 may have diminished effects if extended this year, the analysts said.

“The first thing for people to remember is it’s hard,” Chris Richardson, an independent economist, said. If governments in Australia or elsewhere “could take care of the cost-of-living crisis, then everybody would be using that magic wand”.

The approach taken last year often involved “rejigging money”, so households ended up better off at the expense of companies, Richardson said.

Examples included setting a price cap on gas that trimmed some of the windfall profits of energy companies after Russia’s invasion of Ukraine, rather than any actions drillers themselves took. Doubling typical pharmacy prescriptions to 60 days was another.

“The money comes out of profits and goes into punters’ pockets,” he said. “There’s a case for that where profits aren’t reasonable, where something has stopped competition working.”

Cassandra Goldie, the chief executive of the Australian Council of Social Service, called on the government to develop a “serious cost-of-living package” that was “squarely targeted to give help to people who need it the most”.

Goldie noted the near doubling of support during the Covid pandemic lifted 646,000 people, including 245,000 children, out of poverty.

The government’s own Economic Inclusion Advisory Committee found lifting daily jobseeker and related payments to 90% of the age pension from the current $54 to $70 would merely return them to 1999 levels.

“The government must also target energy relief to people who are the most disadvantaged, including by investing in energy efficiency upgrades and solar installations in social housing and low-income rental housing and mandating energy efficiency standards in private rentals,” Goldie said.

Independent economist Saul Eslake said the government deserved “a great deal of credit” for not spending additional revenues that had landed via higher commodity prices, inflation or other sources, unlike some previous Coalition governments.

“That ought to be the template,” he said. “They should avoid the temptation to just throw cash at households.”

Richardson said any increase in benefits, such as rental assistance, could be offset by further cuts or delays in “bad infrastructure projects”. In November, the government said it was cutting 50 such projects.

According to the RBA, government electricity rebates, increased childcare subsidies and other changes in government policies “subtracted around half a percentage point from headline inflation [of 5.4%] in the September quarter”.

One challenge is that policies that helped households last year may not have the same effect as last year, Eslake said. Childcare support, for instance, was already covering much of the cost of that service.

Other possible actions could include tweaking or delaying the controversial stage-three tax cuts that will pump about $21bn into the economy next fiscal year.

Reducing the GST temporarily from 10% to 9% would help reduce prices immediately but would require compensating the states to the tune of $8.8bn a year, Richardson said.

Some price pressure relief, though, may already be on the way, easing the need for government action that anyway wouldn’t take effect until after the May budget.

Wholesale power prices, for instance, were down 70% in the September quarter from a year earlier and should at least result in smaller increases in 2024. Global oil prices have also dropped in recent months, bringing the prospect of cheaper motor fuel.

“We do see inflation continuing to moderate – it’s just a question of how quickly,” said Taylor Nugent, a senior Nab economist. Nab is among the minority of banks to predict the RBA has one more rate rise to come, most likely in February.

Nugent said while government subsidies might reduce “measured inflation” by lowering the cost of item picked up by the Australian Bureau of Statistics, the actions only mask the “aggregate” inflation in the economy.

The support “means that people have more money to spend on other things, and so, on a forward-looking basis, it puts upward pressure on inflation, more generally”, he said. “That slows that rebalancing of supply and demand that the RBA is looking for in order to get inflation back on a more stable basis.”

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