Treasurer warned not to 'poke the inflationary bear'

Inflation should keep new budget spending in check if Labor wants borrowers to get interest rate cuts before the next election, leading economist Chris Richardson has warned.

Spending is still increasing but not as quickly as the federal government is raking in extra revenue from taxes, with the top budget-watcher estimating the budget bottom line may be $28 billion better off over four years compared to official estimates.

With little over a week to go before the Albanese government hands down its third budget, Mr Richardson said the budget should try to avoid “poking the inflationary bear” by proceeding cautiously with extra spending.

Economist Chris Richardson hopes to see a boost to Jobseeker payments in the federal budget. (Lukas Coch/AAP PHOTOS)

Strong inflation data has pushed back expectations for interest rate cuts. With that backdrop, Mr Richardson said taming price pressures should be a priority for a government hoping to see a rate cut before next year’s election.

“So inflation limits what the government can and will do in the budget,” he wrote in his pre-budget analysis.

“That’s likely to be a relatively binding constraint because it would be politically dumb to pour so much extra into the economy that the Reserve Bank of Australia had to raise rates.”

Despite this warning, the economist said the government should find room to boost Jobseeker and youth allowance support payments to lift vulnerable Australians out of poverty.

Mr Richardson is expecting a second consecutive surplus in 2023/24, of around $13.4 billion.

That would be a sizeable improvement on Treasury’s latest forecasts of a slender $1.1 billion deficit for this financial year.

In 2022/23, the government delivered a $22.1 billion surplus – the first in 15 years.

Treasurer Jim Chalmers said he was still hoping to land a second surplus but last week played down its likely size and the scale of expected revenue upgrades.

Due to “war and inflation”, Mr Richardson is forecasting $41 billion more in revenues than Treasury did in the last official forecast over the four years to 2026/27.

Yet the revenue surprises are shrinking in size. In the October 2022 budget, Treasury added $145 billion to expected revenues, and $131 billion extra at the May 2023 budget.

“This trend is not our friend”, he said.

He warned the government not to make the “oldest mistake in the budget” by making permanent promises off the temporary good news from war and inflation.