Full width project banner image

Pre-election budget criticised

Mar 30, 2022

Share this article

The big spending pre-election budget provides short-term relief for households struggling with rising cost of living pressures but has been criticised for failing to provide long-term solutions.

The budget delivers $8.6 billion worth of temporary cost of living measures at a time of rising inflation, with some experts warning they will add to inflationary pressures ahead of an interest rate hike that may come as soon as June.

While the budget attracted the usual mixed reaction, both the Committee for Economic Development of Australia and the Australian Council of Social Service slammed its reliance on short-term quick fixes.

CEDA chief economist Jarrod Ball said the budget's focus on temporary measures to alleviate rising costs of living will be welcomed by many.

"But the budget has only taken modest steps to permanently lift the capacity of households to navigate the growing pressures on the economy," Mr Ball said.

"The $8.6 billion of cost of living measures mostly benefit income earners and motorists, with many income support recipients receiving the least relief from cost of living pressures.

"With growing inflationary pressures and interest rate rises on the horizon, cost of living pressures will not dissipate any time soon and these measures do not provide a long-term solution."

More than 10 million low- and middle-income earners will get a one-off $420 cost of living tax offset, six million welfare recipients receive a one-off $250 cost of living payment, and the fuel excise has been halved for six months.

ACOSS chief executive officer Dr Cassandra Goldie attacked the "flash in the pan budget", saying much of the assistance goes to people who don't need it and too little goes to those who need support.

"This budget is full of temporary fixes, when we need permanent solutions," Dr Goldie said.

The fuel excise cut would have been better spent lifting income support and boosting social and affordable housing, she said.

"Unfortunately, although the government says this is a cost of living budget, it fails to deal with the biggest cost of living, which is housing. Perversely, the housing measures it contains will very likely push up house prices and make housing affordability worse."

Treasurer Josh Frydenberg defended the cost of living measures, describing them as being targeted, responsible and delivered at a time when Australians needed it most.

"The measures we announced last night were responsible, they were targeted, they were temporary, and they were designed to provide cost of living relief for Australians who need it most," Mr Frydenberg said on Wednesday.

The budget papers note inflation is expected to rise to 4.25% through the year to the June quarter of 2022, reflecting higher global oil prices and ongoing supply chain pressures as well as price pressures in the housing construction sector.

But Mr Frydenberg said inflation is then expected to start to moderate, which will help alleviate some of the cost pressures faced by households.

The fuel excise reduction is expected to reduce headline inflation by a quarter of a percentage point in the June quarter, he added.

Westpac Group chief executive officer Peter King said the budget strikes the right balance.

"With many Australians paying higher prices, this support will make a difference," Mr King said.

"Together with major commitments on infrastructure projects across the nation, more work on wage subsidies for apprentices and incentives for businesses to hire them, the budget strikes the right balance between providing much needed short-term assistance and lifting Australia's long-term growth potential."

The federal government is expected to soon call an election for May.

An interest rate rise is on the way

Some economists warned the budget's cost of living measures will add to inflationary pressures, although they have not changed their expectations for when the Reserve Bank of Australia will lift the cash rate from the record low 0.1%.

"The cost of living payments announced in the budget will add to near-term demand and inflation pressures in an economy where rising inflation is already a concern," Commonwealth Bank of Australia economists said, noting the fuel excise cut will reduce inflation in the second quarter.

CBA chief economist Stephen Halmarick said the extra stimulus the pre-election budget will apply to the economy is relatively muted.

"However, given rising inflation and strong employment and wages growth, we maintain our view that the Reserve Bank of Australia will raise interest rates in the near-term, with an initial increase to 0.25% expected in June this year, rising to a peak of 1.25% in early 2023," Mr Halmarick said.

Borrowers have been advised to prepare for an interest rate rise, which could happen this year. Picture: Getty

AMP chief economist Dr Shane Oliver said the budget provides a "magic election pudding" of more spending but lower deficits.

"The pre-election cash splash… risks overstimulating the economy at a time when it is already strong, further adding to inflationary pressures and adding to the amount by which the RBA will have to hike interest rates," Dr Oliver said.

He said the extra stimulus in the budget increases the chance that the first rate hike in June will be a 40 basis points rise rather than 15 basis points. That would take the cash rate to 0.5%, with AMP expecting it to reach 1% by the end of the year.

Westpac chief economist Bill Evans said the total spending in the budget is a bit more than expected but he did not expect the measures to massively increase demand and change the RBA's thinking.

"It's a bit more than I expected but I don't think it's enough to say shock horror - the Reserve Bank governor will go to work tomorrow and say we must raise interest rates," Mr Evans said.

Mr Evans, who expects the first rate increase will be in August, noted the RBA board is still being patient and is in a "wait and see" mode.

National Australia Bank economists also noted "there is as much politics in this budget as economics", but said the budget did not change their expectations for monetary policy.

"The RBA will move soon to moderately increase rates - we expect that process to start by August this year," the NAB economists said.

Housing supply remains a key issue

Property industry groups have praised the budget's key housing measures but also warned supply remains a major issue in addressing affordability challenges.

The budget’s major housing initiatives were an additional $2 billion in low-cost financing to community housing providers and a significant expansion of schemes helping first-home buyers struggling to save a deposit as property prices surge.

Property Council of Australia chief executive Ken Morrison said Australia's economic recovery has been remarkable and the budget confirmed strong conditions are likely in the year ahead.

"However, it is clear that the budget results are contingent on a strong bounce back in population growth and there are risks that falling housing supply also becomes a looming drag on the economy," Mr Morrison said.

The budget highlights the extent of the housing supply crisis, predicting dwelling investment levels will drop from 5% growth in 2021/22 into negative territory (minus 0.5%) by 2023/24, he pointed out.

"Both HomeBuilder and the expanded Home Guarantee Scheme are welcome demand-side measures, and cannot address the supply-side issues which increase the cost of new homes," he said.

Industry groups say more needs to be done to tackle the issue of housing supply, including in regional areas. Picture: Getty

The Urban Development Institute of Australia said the budget backs the housing and construction industry to prime the economic recovery and start tackling the affordability crisis.

"The federal government budget delivers on some important areas which will drive the economic recovery, bringing back migration and stripping away some of the barriers to delivering housing supply," UDIA national president Max Shifman said.

"The importance of boosting supply across the housing spectrum cannot be underestimated - without it, the escalating affordability crisis will tip more and more Australians into crisis and overwhelm government funding."

The UDIA also said the government's $120 billion in infrastructure funding over 10 years will pave the way for state and territory governments to deliver the enabling infrastructure to deliver a pipeline of development-ready land.

"Lack of major and enabling infrastructure is blocking delivery of housing across Australia - these initiatives are crucial to righting the imbalance housing market," Mr Shifman said.

With the Home Guarantee Scheme doubling to 50,000 places a year for the next three years, including a new program targeted at regional areas, PropTrack economist Angus Moore said the expansion will help some first-home buyers get into the market sooner in the short term.

"But if we're serious about solving housing affordability, the only long-term solution is to build more homes where people want to live," Mr Moore said.

Real Estate Institute of Queensland CEO Antonia Mercorella questioned whether the scheme's expansion went far enough to have a meaningful impact, also calling for all levels of government to address housing affordability and supply.

"While expanding the Home Guarantee Scheme is a good start and definitely a step in the right direction, it must be acknowledged that 50,000 places is not nearly enough to meet national demand," Ms Mercorella said.

Real Estate Institute of Australia president Hayden Groves said the "budget for the times" is great for home ownership but the future of housing supply needs to be tackled by all levels of government.

"Until this is addressed, the right supply mix within our existing housing stock and new homes affordability is unlikely to improve in the near term."

Mr Groves said people can be reluctant to list their home for sale or rent during pre-election periods, but they should be reassured by the budget.

"With a budget that deals directly with inflationary pressures, contains a moderate outlook for interest rates and supports key investment measures like negative gearing retaining bipartisan support, Australians should move forward with plans to sell and capitalise on the current strong market."

Affordable housing boost criticised as not enough

The budget lifts the National Housing Finance and Investment Corporation's lending capability to $5.5 billion, with the additional $2 billion in low-cost financing to community housing providers expected to support about 8000 more social and affordable dwellings.

Mission Australia chief executive officer Sharon Callister said the increased NHFIC cap is welcome, but addressing the magnitude of need for affordable housing and homelessness service delivery will take much greater investment.

"Australia is grappling with a housing affordability crisis, social housing waiting lists of more than 200,000 people and a rate of JobSeeker and other income support payments that leave many in poverty and unable to pay their rent," Ms Callister said.

"We need urgent action from the federal government to provide long-term housing solutions that will address our social and affordable home shortfall."

A number of advocacy groups have called for more investment in affordable and social housing. Picture: Getty

Emma Greenhalgh, CEO of National Shelter which advocates for low-income households, said the only focus in the budget is on measures that "provide fuel to an already inflated market".

"At a time of a national housing emergency, there is nothing on offer from the federal government to address the housing circumstances of households in greatest need," Ms Greenhalgh said.

Everybody's Home national spokesperson Kate Colvin said the government's failure to invest in additional social and affordable housing will worsen the housing crisis for low to middle income Australians in the rental market.

"People on low and modest incomes need real housing solutions, instead they are getting rhetoric and bandaids," she said.