Stubbornly high inflation will eat into real wage gains

Australian households remain on track for a return to real wage growth but the pay gain when adjusted for inflation is likely to be smaller.

The mid-year federal budget update released on Wednesday also revealed a healthier bottom line thanks to higher taxes paid by companies and individuals than first thought.

The updated budget papers showed pay packet growth moving in front of consumer price increases by early 2024, as was forecast in May.

But an update in the near-term inflation forecasts have eroded the size of the real wage increase by half a percentage point in 2023/24, keeping pressure on already-stretched household budgets.

"Any of those near-term changes are more a reflection of the inflation part of the story than the wages part of the story," Treasurer Jim Chalmers told reporters.

Consumer prices are still expected to come back to the target band in the June quarter of 2025.

Members of the public shop for fresh produce.
Consumer prices are still forecast to come back to the target band in the June quarter of 2025.

But in the near term, the inflationary pulse has proved stronger than expected, with Treasury highlighting higher global oil prices flowing through to the petrol pump as the main culprit.

Thanks to a surprise revenue boost - from strong commodity prices, like iron ore, and a higher income tax take in a strong labour market - a narrower deficit of $1.1 billion is tipped for 2023/2024, from the $13.9 billion predicted in May.

Dr Chalmers said this put the budget within "striking distance" of a second surplus.

"We've been deliberately cautious and deliberately conservative - we've seen in recent times, under our predecessors, what happens when you over-promise and under-deliver," he said.

As well as a much smaller deficit in 2023/24, almost $40 billion in total has been wiped off deficits through to 2026/27.

Dr Chalmers said his government was exercising responsible economic management by banking 92 per cent of the upward revisions to revenue, helping pay down debt and take pressure off inflation.

A cost of living relief package was announced in the May budget, including energy bill help, though there was nothing extra handed out in the mid-year update.

The treasurer said he would revisit the matter heading into the next budget.

KPMG chief economist Brendan Rynne said the high tax take was payback after the stimulus packages rolled out to stabilise the economy during the pandemic.

"Achieving this high tax take is therefore in essence taxpayers repaying the social cost of seeing the economy through the other side of pandemic without much economic scarring," Dr Rynne said.

He said this was necessary and would allow the national debt position to fall, freeing up space for nation-saving policies when the next economic shock hit.

Opposition finance spokeswoman Jane Hume said the government had announced $209 billion in extra spending since coming to power, and was not doing enough to bring down inflation.

Students reading at a university campus.
The return of students is expected to help offset sluggish home building and household spending.

"The government is asking you to pat them on the back for not spending money, not spending revenue they weren't expecting," she said.

Greens senator Nick McKim said opportunities to ease financial pressure on households were missed, such as putting dental and mental health into Medicare.

“Despite millions of Australians struggling to afford food and rent, Labor has confirmed today it will continue with $317 billion in state three tax cuts for politicians, billionaires and the wealthy,” he said.

Australia is also tracking towards a slightly stronger year for economic growth.

Solid public and business investment and the return of students and tourists post-pandemic is expected to offset sluggish home building and household spending, weighed down by high inflation and interest rate hikes.

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