They’re off! The starter’s gun for the election race has been fired, putting behind us the normal commentary on winners and losers from the Albanese government’s budget and the Dutton-led opposition’s budget reply. Usually, election campaigns are replete with announcements of new voter-friendly spending and tax-cutting policies. Not this time.
How do we know?
A little-noticed line item in every budget is “decisions taken but not yet announced.” This is lumped in with commercial-in-confidence items that cannot be disclosed publicly. Together, they amounted in Tuesday’s budget to around $10 billion over four years. That’s a puny war chest of new policies to be unveiled during the election campaign.
Spending restraint during the election campaign makes good sense. The turnaround in the government’s fortunes in the polls has coincided with the Reserve Bank Board’s decision at its February meeting to cut the cash rate for the first time in more than a year.
It was a small reduction of 0.25 percentage points but a reduction, nevertheless.
Its value was to signify to households that the worst of the cost-of-living pressure might be over, the inflation rate having fallen from 7.8 per cent in the last three months of 2022 to just 2.4 per cent in the corresponding period in 2024.
A big-spending, tax-cutting election campaign would put that progress at risk, placing pressure on the Reserve Bank to pause any further reductions in the cash rate.
That’s why in his budget speech Treasurer Jim Chalmers described the tax cuts as “modest” and part of a “responsible” cost-of-living package. The budget’s official forecasts will provide further reassurance to the Reserve Bank Board, the inflation rate remaining within the Reserve Bank’s target range of 2-3 per cent over the three-year forecast period.
The next Reserve Bank Board meeting will be on Monday and Tuesday, with a media conference to be held on Tuesday. The following meeting will be on 19-20 May, after the election.
All the economic data points to a further rate cut on Tuesday. The trimmed mean inflation rate, which takes out the 15 per cent fastest-growing and the 15 per cent slowest-growing prices, and which the Reserve Bank uses in deciding the cash rate, fell to just 2.7 per cent last month and has been within the Reserve Bank’s 2-3 per cent target range for the last three months.
There’s no wages breakout and the labour market is not “running hot” as the Reserve bank feared last year. Instead, more than 50,000 jobs were lost in February. So no wage-price spiral is evident or in prospect. Moreover, the Reserve Bank acknowledges that the current level of the cash rate is “restrictive”.
While all this recent data points to a further cut in the cash rate on Tuesday, markets are ascribing a very low chance of this happening. But a cut in May is deemed highly likely. That would occur just after the election.
Either way, the Reserve Bank Board is likely to announce or foreshadow another rate cut.
Labor politicians who were politically conscious back in 1987 will note an eerie resemblance of current circumstances to those back then. Australia had suffered a catastrophic collapse in prices for its agricultural exports because of a trade war between the United States and the European Union. The Hawke government made big spending cuts in a 1987 May Statement. Bob Hawke called an election for early-July under the banner of “Let’s stick together, let’s see it through.”
The election campaign song went on: “We’re on our way; we’re on the right track” and “No one ever got anywhere changing horses in mid-stream”.
While the political historians attribute the 1987 Labor victory to the Joh-for-PM campaign, it was more because the Liberals stuffed up their expensive tax policy and John Howard promised to “take a scalpel to Medicare.”
Sound familiar? Albanese is campaigning on strengthening Medicare while highlighting Dutton’s negative position on Medicare when he was health minister.
And on tax, in 2024 the Coalition voted against Albanese’s revamped Stage 3 tax cuts that gave bigger tax cuts to lower- and middle-income earners. It did so again in relation to Tuesday’s budget tax cuts.
The message Albanese and his team will seek to convey during the campaign is: the worst of the cost-of-living squeeze is over and now is not the time to risk it all – along with Medicare – by voting for Peter Dutton. It wasn’t on a whim that Albanese produced a Medicare card at his media conference announcing the election.