Australia government forced to lift inflation forecast, keeps spending plans intact

[SYDNEY] Australia’s government on Wednesday (Dec 17) revised the outlook for inflation sharply higher, but it still added to its annual spending plans, leaving it up to monetary policy to lean against cost pressures in the economy.

In its Mid-Year Economic and Fiscal Outlook (MYEFO), the Treasury boosted its forecast for inflation to 3.75 per cent in the current year ending June 2026 to reflect the recent price surge, up from 3 per cent in its main Budget last March.

That drove forecasts for nominal gross domestic product sharply higher to a whopping 5.25 per cent this financial year, a strong result that would lift tax receipts by A$15 billion (S$12.8 billion).

However, that was offset by a A$9.1 billion increase in payments, which left the Budget deficit only a little smaller than previously projected at A$36.8 billion.

“While inflation has increased recently, this is similar to the experiences in many advanced economies and is partly due to temporary factors,” said the Treasury.

“However, the increase in services inflation and prices of newly constructed dwellings could be more persistent, and are in line with the sustained recovery in demand.”

The Reserve Bank of Australia (RBA) has cut interest rates three times this year to 3.6 per cent, but a recent spike in inflation – with the monthly headline measure surging to 3.8 per cent in October – has forced policymakers to warn that rate hikes might be needed next year.

Two of the four major banks – the National Australia Bank (NAB) and the Commonwealth Bank of Australia – are now expecting the RBA to raise interest rates in February next year. NAB even called for a second hike in May.

Westpac on Wednesday also abandoned its rate cut calls, saying it now sees rates on hold throughout 2026.

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The Treasury expects economic growth to pick up to 2.25 per cent in the financial year, largely unchanged from before. However, that is still above the RBA’s estimates of trend growth of 2 per cent, and could generate more inflationary pressures.

The unemployment rate is seen edging up slightly to a peak of 4.5 per cent, from 4.25 per cent before.

The Treasury projected a deficit of A$36.8 billion for the current FY2026. That compared with a forecast of A$42.1 billion in its pre-election Budget last March, but came above forecasts of about A$32 billion by analysts.

The projected deficit for the three years to FY2029 is now A$106.6 billion, more or less what was expected in March. REUTERS