Australia to raise spending to boost slowing economy amid inflation

Australia’s new government released plans on Tuesday for more spending on families, the elderly, defence and its Pacific neighbours as the country braces for an economic slowdown due to rising interest rates, inflation and disastrous floods.

Treasurer Jim Chalmers delivered his centre-left Labour Party’s first annual budget for the fiscal year that began in July.

It is the first budget in nine years by a Labour government and comes as Australia contends with unprecedented levels of debt that has mounted during the COVID-19 pandemic.

Chalmers said rising inflation was the primary influence on his economic blueprint. Inflation is forecast to peak at 7.75 per cent by December and remain higher for longer than had previously been expected.

It’s framed against a backdrop of a complex combination of a serious economic downturn overseas, damaging and devastating natural disasters here at home, war in Europe, a slowdown in China brought about by COVID — all of these issues combining at once, Chalmers told reporters.

We are still optimistic about the future of our economy and the future of our country, but there is no use pretending that we don’t have some difficulty to navigate in the near term, he said.

To get the budget measures through Parliament, compromises may be required.

The previous conservative government had forecast in its last budget in March a deficit of 78 billion Australian dollars (USD 49 billion) for this fiscal year.

The new government’s forecast more than halves that to 36.9 billion AUS dollars(USD 23.3 billion), thanks mainly to extraordinarily high prices for commodities including iron ore and coal. But deficits are expected to rise again as commodity prices normalise.

The economy is forecast to grow 3.25 per cent in the current fiscal year before plummeting to 1.5 per cent in 2023-24 one percentage point lower than was projected in March as rising interest rates hit consumer spending. Growth is then forecast to creep up to 2.25 per cent in 2024-25 and to 2.5 per cent the following year.

Chalmers said a weakening of household spending was a very concerning development and inevitable after six consecutive monthly interest rate hikes so far this year.

When the central bank lifted the benchmark cash rate by a quarter percentage point to 0.26 per cent in May, it was Australia’s first rate hike in more than 11 years. The bank lifted the rate to 2.6 per cent at its October meeting and said rates would continue to rise, prompting economists to warn of a recession.

Australia’s gross debt as a share of GDP is forecast to reach 37.3 per cent or 927 billion AUS dollars (USD 586 billion), by the end of the current fiscal year and to continue to rise through the decade.

The proposed budget would help families cope with higher costs by increasing subsidies for child care and phasing in an increase in paid parental leave from 18 weeks to 26 weeks by 2026.

The government says such spending on families increases the productivity of parents.

Standards and staffing levels will be raised in homes for older people, who will also benefit from higher subsidies for medicines by up to AUS dollars 12.50 (USD 7.90) for each prescription.

Defence spending was exempt from budget cuts, increasing by 8 per cent in the current fiscal year to above 2% of GDP with plans to remain at that level or above for years to come, government documents said.

Australia will announce in March what type of nuclear-powered submarine it wants manufactured as part of a partnership( struck with the United States and Britain last year known as the AUKUS agreement. Money to build the new submarine fleet is not yet allocated.

The proposed budget earmarks AUS dollars 213 million (USD 135 million) for additional defence spending on the Ukraine over five years.

Australia is currently the biggest contributor to the Ukraine war effort outside NATO, having provided AUS dollars 500 million (USD 316) in weapons and equipment.

The Labour government has promised closer relationships with its Pacific island neighbors after China signed a bilateral security pact with the Solomon Islands early this year that raised fears a Chinese naval base might be established in the South Pacific.

The budget proposes an additional AUS dollars 900 million (USD 570 million) in aid for the Pacific region and AUS dollars 470 million (USD 297 million) for Southeast Asia.

Australia’s economic plight has been worsened by months of rain that has flooded much of the country’s southeast, hurting farm export earnings and adding to inflation due to fruit and vegetable shortages.

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