How to help the needy without fuelling inflation - Grattan Institute

If there was any question about what this budget would be about, the Reserve Bank’s surprise move on interest rates last Tuesday sealed the deal. This is a budget about the cost of living.

Australian households are feeling the squeeze. Real household incomes went backwards last year. Two groups are doing it particularly tough – low-income renters and low-income mortgage holders. Both face a sharp increase in housing and other costs, and have less discretionary “fat” in their spending to manage these pressures.

The government’s central challenge is how to deliver relief to the most hard-pressed without adding to the inflation problem (not to mention the longer-term fiscal challenge).

So far, it has made some sensible decisions.

The budget will announce energy bill relief for more than 5.5 million households, delivered via reductions in retail energy bills. Out-of-pocket childcare costs will decline for many families from July 1, when the government increases the childcare subsidy. In addition to providing relief to households, these changes will reduce inflation, at least in the short term, by reducing the price of these services in the CPI basket.

The already announced change to pharmacy dispensing rules will similarly reduce costs to households. Allowing people to receive two months of medicine on a single script will reduce trips to the GP and pharmacies, saving patients both money and time. The change provoked the Pharmacy Guild to kick off one of its famous scare campaigns, but it looks like unambiguously good policy.

Likewise, the “decision” not to continue the Low and Middle Income Tax Offset (LMITO) in this budget is the right one. It was always designed to be temporary and has been replaced by the stage 2 tax cuts – which effectively offered the same relief to taxpayers through the permanent scales.

The LMITO was kept running alongside the stage 2 cuts in 2021 and 2022 to provide stimulus. Extending the $11 billion offset payments would pour more fuel on the inflation fire. And it would not be targeted at those that most need support because, despite its name, it offers the biggest relief for middle and upper-middle earners.

Cost-of-living crisis

The biggest balancing act on the budget night is how much the government will do to support the most vulnerable households: those that are on working-age welfare payments. These households are at the frontline of the cost-of-living crisis because JobSeeker and related payments are woefully short of what is needed for a basic standard of living.

Greater support for single parents – by maintaining the Parenting Payment until the youngest child turns 13 or 14, instead of 8 – and a JobSeeker rise are rumoured to be on the table. But on the latter, the government has flagged concerns about the inflationary and fiscal impact of going as far as the $132-a-week increase its Economic Inclusion Advisory Committee recommends.

Ultimately, the inflationary impact of the budget depends on the overall balance of measures. The government has rightly committed to bank windfall gains but could deliver targeted relief for single parents and JobSeeker recipients if it is willing to offset those measures elsewhere.

There are many changes to tax and spending that could help do that. As one example, redesigning the stage 3 tax cuts – by retaining the 37¢ bracket – would still offer some compensation for bracket creep but would reduce the size of cuts for people earning above $120,000. The $8 billion-a-year saving would be sufficient to neutralise the fiscal and inflationary impact of a meaningful increase to the JobSeeker payment.

But budgets should also go beyond solving short-term problems. If the government is serious about long-term cost-of-living relief, this budget is the time to put some teeth into its Housing Accord.

NIMBY backlash

Boosting supply in the areas people want to live in – generally in suburbs within a reasonable distance of major urban centres – is the single biggest thing governments could do to improve long-term housing affordability and kick-start economic growth.

The biggest barrier is overzealous planning restrictions that impede medium-density development in our inner and middle-ring suburbs. State governments have the capacity to change this, but the NIMBY backlash often weakens resolve. To break through, the federal government should offer incentive payments to state governments to add new housing supply. This would be an investment in better long-term social and economic outcomes.

The budget smoke signals suggest the government will make some sensible decisions to ease short-term cost-of-living pressures. But it could and should go further. Committing to providing meaningful support to people struggling on welfare support can be done responsibly, within the right budget package. And if combined with long-term reforms to improve housing affordability, the government would have a good case to show it had met the cost-of-living challenge.

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