Is it possible to ease cost of living without adding to inflation, as Chalmers claims?

Economists say it’s possible tomorrow’s federal budget could provide meaningful cost-of-living relief without adding to inflation. 

Treasurer Jim Chalmers has said a $14.6 billion cost-of-living package will be the centrepiece of the budget, helping households pay their energy bills — without making inflation worse.

“What we’ve tried to do with this $14.6 billion cost-of-living package is calibrated in a way that doesn’t add to inflation,” Chalmers told ABC Radio on Monday morning. 

“We’re conscious as we work through the various options which ones do and don’t add to the inflation forecasts in the budget.”

The package will include energy bill relief for 5.5 million households, as well as measures to help pay for medicines and other essential goods. 

Two economists who spoke to Crikey said it was possible Chalmers could pull off cost-of-living relief without increasing inflation.

“I think it’s appropriately targeted,” senior lecturer in economics at RMIT Leonora Risse said.  

“We’re talking about a scenario where people’s income isn’t changing, but their essential costs are changing — that means they’re forced to make trade-offs, to forgo electricity so that they can pay the rent, groceries or medical fees.

“I think it is quite justified because of the extreme cost-of-living pressures at the moment.”

Risse compared this kind of targeted relief with broader packages, such as the fuel tax subsidy brought in at the former government’s last budget. 

“That type of subsidy is so broad it would have gone to some consumers who were going to spend money on petrol anyway, and weren’t actually financially strained,” she said. 

“That’s an example of where it could have been inflationary.” 

Monash University economics lecturer Isaac Gross said it was likely Tuesday’s budget would “smooth out the path for inflation”, lowering it in the short term while possibly adding to it in a few years’ time. 

“While some measures the government has chosen might push up inflation in the medium term, they’re taking a lot of other measures aimed at lowering inflation,” he said. 

“So a lot of infrastructure projects being postponed or delayed, for example. That’s part of their efforts to reduce inflation.

“These cost-of-living measures are going to be targeted, so they’re not going to apply across the board. I don’t think they’re going to have a broad impact on inflation.” 

Risse said there were more things that could be done to curb inflation, including incentivising households to save money by increasing interest rates on savings accounts. 

“When we look at the ripple effect of cash rate increases, it’s not just mortgage holders who are expected to respond by spending less — it’s also across the economy, encouraging people to save,” she said.

“If we’re in a situation where we’re going to blame inflation on the lowest income earners of society, then public policy is really not well designed.”

Opposition finance spokeswoman Jane Hume told ABC Radio on Monday that a “genuine cost-of-living budget” would rein in spending as getting inflation down was the “only policy” that would provide relief to households.

She was not convinced Chalmers’ budget would bring inflation down. 

“What they said is that [the government’s] spending won’t add to inflation,” Hume said. 

“Well, that is yet to be seen. But it certainly isn’t bringing inflation down.”

Is it possible to ease the cost-of-living burden without a boost in inflation? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.