The 2008-09 Budget is unlikely to have any significant impact on inflation in the short term, according to Griffith University Economics Professor Tony Makin.
“Australia’s inflation rate, expected to increase above four per cent next financial year, is mainly due to international factors and reflects higher commodity prices, including oil,” Professor Makin said.
He said the foreshadowed income tax cuts would not add to inflationary pressures from the aggregate demand side of the economy for three reasons.
“Firstly, to have a significant impact on inflation, tax cuts must be substantial within the context of total spending in the economy, but expected net tax cuts next financial year will probably be not much over a half of one percent of GDP.
“Secondly, to boost inflation income tax cuts must be fully spent on domestically produced goods and services, but we can expect them to be partly saved — to pay off mortgages, or added voluntarily to superannuation.
“Thirdly, a sizeable part of tax cuts that households will actually spend will be on imports, which doesn’t add to demand for domestically produced product, so it is not inflationary.”
On the supply side of the economy, the beneficial work incentive effects of income tax relief will alleviate labour market pressures, including the push for higher wages to maintain living standards in the face of rising inflation, Professor Makin said.
“Budgetary initiatives that reduce government consumption spending or raise economy-wide production will assist fight inflation, but not significantly in the short term,” Professor Makin said.
“Again, this is because they will be relatively small compared to GDP and will be spread over a whole year, in contrast to official interest rate hikes which have more immediate effects.
“The fixation with ever larger budget surpluses to the detriment of private saving continues unabated in federal policy circles. We need to know why Australia runs such large surpluses when budget deficits are routinely accepted by policymakers in major OECD economies experiencing comparable inflation rates to Australia.”
As a percentage of GDP this year the United States, Britain and the Euro area will have budget deficits of 2.4, 3.2 and 0.8 percent respectively.