Federal Budget 2023: If Australians get a pay rise that outpaces inflation

Australian workers’ wage packages are set to rise faster than inflation from June next year and the worst cost-of-living crisis in three decades could ease by the end of 2023.

The good news is forecast as Treasurer Jim Chalmers announces a budget surplus – thanks to China’s insatiable demand for iron ore – becoming the first Treasurer of the Federal Chamber of Labor since 1989 to present a spending program in the black.

Headline inflation, also known as the consumer price index, hit a 32-year high of 7.8 percent in 2022 but fell to 7 percent in the most recent quarter.

Treasury budget papers forecast CPI to weaken to 6 percent by June this year, before falling to 3.25 percent by June 2024, just above the Reserve Bank’s target of 2 to 3 percent.

At that point, the wage price index was expected to reach 4 percent, a level not seen since 2009 during the global financial crisis.

This means that at this point Australian workers, who have suffered an effective cut in real wages, will finally see their wages rising faster than inflation.

The Treasury now expects inflation to fall to 2.75 percent by June 2025 as wages rose a more moderate 3.25 percent. That means workers will still have more purchasing power even if bosses don’t offer generous wage increases.

Unemployment was expected to remain at a 48-year low of 3.5 percent in June 2023, but would rise to 4.25 percent by June 2024 as interest rate hikes pushed economic growth from 3.25 percent only 1.5 percent collapsed.

The RBA, which has raised rates 11 times since May, does not expect inflation to fall back to its target range until mid-2025, and Governor Philip Lowe has hinted at further rate hikes, with the benchmark interest rate hitting an 11-year high of 3.85 percent in May.

Despite the pandemic spending of 2020 and 2021, Dr. Chalmers to be the first Labor Treasurer to deliver a budget surplus since Paul Keating in 1989.

dr Chalmers announced a surplus of $4.2 billion for 2022-23, equivalent to 0.2 percent of gross domestic product.

This is a significant reversal from the March 2022 budget – the last of his Liberal predecessor Josh Frydenberg – which forecast a $78 billion deficit, equivalent to 3.4 percent of GDP.

It’s also a big improvement over the October 2022 budget – the first of Dr. Chalmers – which forecast a surplus of $36.9 billion for 2022-23, equivalent to 1.5 percent of GDP.

dr Chalmers announced that this is the first budget surplus since 2007-08, without mentioning former Liberal Treasurer Peter Costello’s last budget before the GFC.

“We are now forecasting a small surplus in 2022-23 — that would be the first in 15 years,” he told the House of Representatives.

However, he warned that the 2023-24 budget is expected to show a $13.9 billion deficit as iron ore and coal prices eased.

The spot price of iron ore — the commodity price used to make steel — should fall from $117 per tonne in the March 2023 quarter to an average of $60 per tonne in the March 2024 quarter.

This is only slightly above the October budget forecast of $55 per tonne for 2022-23.

The spot price for metallurgical coal was expected to fall from $342 per tonne to $140 per tonne by mid-2024 – similar to the October forecast of $130 per tonne this fiscal year.

Thermal coal prices were expected to fall to $70 from $260 a tonne, slightly above the $60 a tonne forecast last year.

Gross national debt was now expected to surpass $1 trillion in 2025-25, rather than 2023-24 as projected in the October budget.

Dr. Chalmer’s promised surplus is smaller than Mr. Keating’s announced surplus of $9.1 billion for 1989-90, which accounted for 2.5 percent of GDP.

dr Chalmers completed his dissertation on Mr Keating as Prime Minister in 2004 while he was a PhD student at the Australian National University.

Former Labor Treasurer Wayne Swan – for whom Dr. Chalmers, who served as senior policy adviser, announced in May 2008 a budget surplus of $21.7 billion for the following fiscal year, equivalent to 1.8 percent of GDP.

This has been touted as the largest surplus in nine years and the second largest in 35 years relative to the size of the economy.

But that didn’t happen as Kevin Rudd’s Labor government spent $52 billion on two stimulus packages during the global financial crisis, including one that gave Australians $900 in cheques.