Chalmer’s election budget promises inflation will give voters a Christmas treat by returning to the RBA’s 2-3% target by the end of the year.
The question is whether the RBA agrees.
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 16 in our series for 2024 and today’s date is Friday May 17
First, I’ll be talking to I’ll be talking to I’ll be talking to Nick Smith, Vice President and General Manager, Asia Pacific at Smart Communications on how to learn more about some benefits and potential issues of ChatGPT/AI in financial services
And I’ll be talking to AMP Capital chief economist Shane Oliver about Australia’s latest inflation figures.
But first, let’s talk to Nick Smith.
So what’s happening in the news.
Australia plans to unleash a wave of spending from power bill subsidies to tax breaks for critical minerals and new warships as the centre-left government tries to win back voters ahead of an election due in a year. The government’s books will swing back to a deficit of $28.3 billion, or 1% of gross domestic product, in fiscal 2025, swelling to $42.8 billion in the following 12 months, the Budget papers showed. The 2025 deficit is more than double economists’ estimates and comes after the government posted surpluses in its first two years in office as it sought to restrain inflation. The federal budget will deliver a $9.3 billion surplus for the current financial year ending in June. But the next three financial years will each have higher deficits than the government had expected as recently as December, owing to what it calls “unavoidable spending”. The figures for the upcoming financial year, 2024-25, will be watched particularly closely in the context of inflation. Treasury says the larger deficit is driven by the government’s cost-of-living relief and addressing unavoidable spending pressure. Treasurer Jim Chalmers is trying to steer a credible fiscal path by pushing major initiatives like the government’s signature Future Made in Australia program that aims to capitalize on the green revolution, as well as support for critical minerals, out toward the end of the decade. The budget showed the near-term deficits are driven by cost-of-living relief and A$15.4 billion for health and frontline services that were left unfunded by the previous administration. Treasury’s estimates show inflation could return to the RBA’s 2-3% target later this year, about 12 months ahead of the central bank’s own estimates. In Treasury’s view, inflation will have dropped below 3% by Christmas into the ‘target zone’ the Reserve Bank has long set its sights on. Jim Chalmers says Government assistance with living costs includes A$3.5 billion to help reduce energy bills, which has the added advantage of cutting forecast inflation by about half a percentage point in the 12 months through June 2025. Household spending, which is now very low as households grapple with rising prices and high interest rates, will be surging up again. And wages will still be growing comfortably faster than prices. But in the new year, on this view, the budget says interest rates will be ready to start falling. For a federal government likely to be seeking re-election soon after that, it’s quite the package. But as we heard last week, it’s not what the RBA thinks will happen. According to their forecasts, inflation will be closer to 4% by the end of the year, and won’t drop below 3% until the end of 2025. That outlook led the RBA board to adopt pessimistic tone at its last board meeting, and while it has left interest rates on hold for now, the board discussed whether one more rate rise before the next election would be needed. To put it bluntly, the RBA is now more pessimistic about inflation than the government. The RBA hiked rates 13 times between May 2022 and November 2023 to take the cash rate to 4.35% and has kept the door open to further tightening should inflation remain sticky. The return of the government’s books to the red implies a more expansionary fiscal impulse that could result in interest rates staying higher for longer, economists said. “The treasurer is not making the Reserve Bank’s job any easier with this budget,” said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada. “It’s going to make the job of getting inflation on a sustained basis back to target, particularly core inflation, harder. This will likely keep rates on hold for an extended period.” While the energy relief will pull down CPI in the short-term, it will also free up household income for spending, potentially fuelling inflation, Ong said. EY economist Cherelle Murphy says the Budget doesn’t adequately account for the second-round impacts of the household assistance on spending. When combined with the personal income tax cuts, and cost-of-living measures currently being rolled out by state governments, EY sees a renewed threat to the core inflation. Rates traders are so far leaning toward the RBA’s outlook, with a base case of no change this year and pricing for policy easing beginning around March 2025. The Australian government’s other big expenditure items include $330 billion over the next decade for defence and $22.7 billion for the Future Made in Australia policy that aims to ramp up investment in green mining and high-tech manufacturing. This includes $7 billion over 11 years for critical minerals, with a 10% production tax incentive to boost downstream refining and processing, and $6.7 billion of incentives over a decade to help create a renewable hydrogen sector. Still, the vast majority of this spending has been pushed out to future years. The tax incentives for critical minerals and hydrogen are only set to begin in fiscal 2028 despite Australia’s nickel producers facing pressure from cheap global suppliers, including Indonesia. The government’s coffers have been aided by revenue from high commodity prices and a fully-employed economy, with unemployment at 3.8%. However, Treasury expects unemployment will rise to 4.5% by this time next year, with sluggish economic growth translating into weaker hiring. The terms of trade – the ratio of export prices to import prices – is expected to drop 7.75% next fiscal year. While Australia appears to have moved beyond fears that it would slip into a recession – fears that were quite live at this time last year – Treasury’s forecast for economic growth of just 1.75% this financial year, increasing gradually to 2.5% over the next three years, is nothing to celebrate. This figure is well below Australia’s long-term average of 3.37% over the period from 1960-2023, according to Trading Economics, and will lag the expected global growth rate of 3.25% by a significant margin. Another factor that boosted budget revenue was stronger-than-expected migration, which is now forecast to halve to 260,000 next fiscal year from 528,000 in the 12 months through 2023. The government also plans to adjust some visa categories: this includes a new one to attract exceptionally talented migrants, replacing two existing classes. The budget’s swelling deficits have seen borrowing expectations rise, with net debt forecast at $615.5 billion, or 21.5% of GDP, in June 2026, compared with economists’ estimate of 19.9%. Chalmers has warned the fiscal picture remains challenging in the years ahead against the backdrop of a global economy that’s struggling under the weight of tight monetary policy, a slowdown in China and disruptions from wars in eastern Europe and the Middle East. From a fiscal perspective, the Budget modestly continues the ongoing improvement in the Commonwealth gross debt to GDP ratio. However, there are there are risks to this outlook. Looking ahead, the question is if fiscal consolidation will be sustained as structural spending pressures from the National Disability Insurance Scheme, interest payments on debt, and aged care and health spending continue to build. More broadly, the key issue facing Australia remains its weak productivity performance which the budget doesn’t address because it gives little to business to power up reform of productivity and how effective spending programs such as Future Made in Australia are in allocating resources and boosting productivity growth.
CPA Australia said small business owners across Australia were likely to be underwhelmed by this year’s budget with most of the investment incentives announced for select industries only. CPA Australia chief executive officer, Chris Freeland said small businesses desperately needed a budget that would help alleviate the cost pressures they are facing on a daily basis. The budget outlined some cost-of-living relief for Australian households, but it only included a small amount of energy cost relief for struggling small businesses, Freeland noted. The Council of Small Business Organisations Australia agreed that the budget was a “missed opportunity to back small business”. COSBOA said whilst some measures were welcomed, small business has been left behind in the government’s strategy of picking winners and providing subsidies to selected industries. Chartered Accountants ANZ senior tax advocate Susan Franks said she welcomed the extension of support for small businesses but remains concerned at the growing list of unenacted tax measures and said it was disappointing that the government has not continued the 120% boost for training which would boost productivity.
The Federal Court has issued a stinging rebuke of the Australian government claim that a court order was required to force Elon Musk’s social media site X to block a video of the April stabbing of a Sydney bishop globally. Last month, the independent eSafety Commission persuaded the court to grant an emergency global take-down of the video of the stabbing of Bishop Mar Mari Emmanuel at Christ the Good Shepherd Church, which was live-streamed as part of a sermon. But on Monday, Justice Geoffrey Kennett refused to continue the order. In his reasons published on Tuesday, Justice Kennett ruled that a global ban would not be considered a “reasonable” step – required by Australian law – because it would likely “be ignored or disparaged in other countries”. He found there were “powerful” issues with eSafety’s attempt to regulate the global internet. Lawyers for eSafety had argued a global ban was necessary on the 65 specified videos because Australians could circumvent X’s initial block that was limited to this country using simple technical tools. Justice Kennett wrote that a global ban would clash with a concept called the comity of nations, a mutual recognition by nations of the laws and customs of others. The ruling is also a major setback for the Labor government and its public rhetoric in framing the battle between X and eSafety. Last month, Prime Minister Anthony Albanese depicted the case as a struggle between a country determined to suppress “misinformation” and an “out of touch … egoist” billionaire in Mr Musk. Mr Musk responded by implying the eSafety commissioner, former Twitter executive Julie Inman Grant, was acting as a global Soviet censor. Other legal arguments raised by X about eSafety’s decision-making process did not succeed. Justice Kennett said even if the injunction was ordered, it would be unlikely to be enforced outside of Australia. He added that the “removal of the stabbing video from X would not prevent people who want to see the video and have access to the internet from watching it” because, while harder to find, it can be viewed on other platforms.
Anglo American rejected a raised takeover offer of 34 billion pounds ($42.67 billion) from BHP Group, saying the world’s largest listed miner “continues to significantly undervalue” the company. The London-listed miner had earlier rebuffed BHP’s initial $39 billion all-share proposal made on April 25, dismissing it as opportunistic and saying it would dilute the upside value for its shareholders relative to BHP’s. “The latest proposal from BHP again fails to recognise the value inherent in Anglo American,” Chairman Stuart Chambers said on Monday. The new offer, made on May 7, was 10% higher than the first, or a 15% increase in the merger exchange ratio to lift Anglo American shareholders’ aggregate ownership in the combined group to 16.6% from 14.8%. “We are disappointed that this second proposal has been rejected,” BHP CEO Mike Henry said in a statement. “BHP continues to believe that a combination of the two businesses would deliver significant value for all shareholders.” The revised bid again required Anglo to sell its shares in iron ore and platinum assets in South Africa. “The BHP proposal … leaves Anglo American, its shareholders and stakeholders, disproportionately at risk from the substantial uncertainty and execution risk created by the proposed inter-conditional execution of two demergers and a takeover,” Chambers said. Anglo shares closed down 2.3% at 27.07 pounds, while BHP shares closed up 0.8% at $43.25 before the announcement. Anglo is attractive to its competitors for its prized copper assets in Chile and Peru with demand expected to rise as the world moves to cleaner energy and wider use of artificial intelligence. Its portfolio also includes platinum, iron ore, steelmaking coal, diamonds and a fertiliser project. The mining sector has seen a jump in M&A activity recently, with a total deal value of $26.4 billion in 2023, S&P Global Market Intelligence data shows.
PwC says it is not liable for harm caused to a graduate employee who says she was raped by her boss after getting drunk with colleagues following a company gathering, saying the woman’s alcohol intake and the alleged sexual assault were “not connected” to her employment with the firm. The young woman has filed proceedings against PwC, arguing that it should be held liable after she went to various pubs with her colleagues after a work function at PwC’s offices, and was later raped by her then-boss at her home. The rape allegedly occurred a month after her boss forced her to put her hand on his erect penis and kissed her neck while on a dance floor at a Sydney pub after an end of financial year party. PwC claims the woman never worked directly for the alleged perpetrator, and the firm was not liable for any harm caused to her as a result of the alleged rape because it did not occur in connection with her status as an employee. The firm also claims it should not be found at fault because the alleged perpetrator had engaged in a mandatory “sexual harassment and victimisation in the workplace” training module in the year prior to the alleged rape.
And that’s it for this week. And next week, I’ll be talking to Brad Adams who started developing Rare Foods Australia’s globally unique artificial reefs for abalone while witnessing the decline of wild stocks and the introduction of tighter quotas in the Augusta region of Western Australia. The result is Rare Foods Australia’s world-first ABITATs, or abalone habitats.
And I will talk to economist Saul Eslake about the challenges for Jim Chalmer’s third budget.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week
