Interest Rates, Inflation: Cash Payments Would Have Driven Rates Up, Treasury Data Shows

One-off cost-of-living measures would have added another half percent to soaring inflation, driving interest rates even higher.

That’s according to the latest Treasury modeling, which says that while the federal budget is expected to be improved by $114 billion over the next four years, nearly all of that money will be spent paying down debt.

Treasurer Jim Chalmers said the October budget brought $114 billion in tax hikes to the budget compared to forecast estimates, thanks to high commodity prices and low unemployment.

He said the government would return 99% of upward revisions for the next two years and 92% above forward estimates.

He says this will not cause further inflationary pressures and will keep Australia’s economy strong.

“The budget has been carefully calibrated to meet the challenge of inflation in our economy,” he said.

“If we had spent all the extra revenue, it would have caused more long-term pain for Australian households and for the economy.

“Our budget does not add to inflationary pressures in our economy, (it) achieves responsible savings and provides targeted cost-of-living relief with an economic dividend.”

Dr Chalmers said the over 90% return was far ahead of previous governments, remarkable compared to the Howard-Costello average of around 30% and the previous government’s average of around 40%.

Inflation is currently up 7.3% from a year ago, the highest rate in 32 years.

In an attempt to bring inflation down, the Reserve Bank of Australia raised the interest rate by 0.1 percent to 2.85 in seven months.

Treasury modeling found that if the government had instead promised a lower return and used some of the money to make one-time payments, for example, it would have worsened the economy.

Modeling indicates that such measures would have caused the consumer price index to rise to around 6.25% in the year to June 2023, rather than the 5.75% on which the budget d October was based.

This would likely have caused the Reserve Bank to raise the cash rate to peak at 4.75% in June 2023, instead of the 3.35% forecast in the budget.

Such an increase would have added about $440 per month to a $500,000 mortgage.

“We know we had to act differently than our predecessors to avoid making the inflation problem worse in our economy and forcing the RBA to go even further on interest rates,” Dr Chalmers said.

Originally published as Treasurer Jim Chalmers defends lack of cash giving as interest rate horror scenario is revealed

Leslie M. Gill