Cost of living measures

Budget Review 2022–23 Index

Ian Zhou

A central theme of the 2022–23 Budget is ‘cost of living relief’. The Budget announced an $8.6 billion cost of living package aimed at helping Australians combat rising living expenses linked to recent surges in petrol prices and relatively high consumer price inflation. The cost of living package includes measures such as:

These measures were passed by the Parliament on 30 March 2022. The Treasurer stated in his Budget speech that the Budget ‘delivers cost of living relief now’ and ‘creates jobs for the long-term’, whereas critics have said it is a ‘cash splash’ that does not present a serious plan for the future. Several commentators also raised concerns about the Budget’s potential inflationary impacts, including through these temporary measures.

Temporary reduction in the fuel excise

In March 2022, Australian retail petrol prices increased above the $2 per litre barrier due to rising global oil prices. The price increases are a consequence of OPEC oil supply decisions, exacerbated by global feedback effects from the Russian invasion of Ukraine (Russia being a major crude oil exporter and the war and associated sanctions regimes have disrupted markets). In response, the Australian Government has said it ‘will help reduce the burden of higher fuel prices at home’ by temporarily halving the excise and excise-equivalent customs duty rate that apply to petrol and diesel.

The fuel excise is levied by the Government on petrol and diesel and is built into the retail petrol prices consumers pay at petrol stations. It is levied to raise revenue to fund roads and other infrastructure costs.

From 30 March 2022 until 28 September 2022, the fuel excise rate will be reduced from 44.2 cents per litre to 22.1 cents per litre. The Customs Tariff Amendment (Cost of Living Support) Bill 2022 and the Excise Tariff Amendment (Cost of Living Support) Bill 2022 have retrospectively given effect to the measure.

The Budget estimates that this measure will reduce the Government’s tax receipts by $5.6 billion. Due to the reduction in the fuel excise, the Government will also temporarily cut $2.7 billion in fuel tax credit payments (colloquially known as ‘diesel rebates’) to the mining and agricultural sectors, bringing the total cost of this measure down to $2.9 billion (p. 15).

Budget Paper No. 3 notes the measure will also reduce goods and services tax (GST) revenue by $195 million (p. 108). GST on fuel is viewed by some as a ‘tax on a tax’ because fuel prices already include the fuel excise (in the same way GST applies to prices of services that factor in state payroll taxes).

The Treasurer said the measure ‘will flow through to the bowser over the next 2 weeks’ and that the Australian Competition and Consumer Commission ‘will monitor retailers to make sure these savings are passed on [to consumers] in full’.

One-off cost of living tax offset

The Government announced that they will also increase the low and middle income tax offset (LMITO) for the 2021–22 financial year. A tax offset provides a payment through the tax system to an eligible taxpayer, directly reduces the person’s tax payable. The LMITO was first announced in the 2018–19 Budget as part of the Government’s Personal Income Tax Plan. The 4 subsequent budgets have extended the LMITO.

The 2022–23 Budget announcement means that low and middle income earners will receive a one-off tax offset of $420, in addition to the existing LMITO $1,080 offset, bringing the full offset to $1,500 per person. Taxpayers will receive this one-off tax offset when they lodge their tax returns from 1 July 2022. The LMITO will subsequently be discontinued.

The full offset of $1,500 will only be available to individuals with an annual taxable income between $48,001 and $90,000. This is because the tax offset offered by the LMITO starts to phase out above the $90,000 threshold, reaching zero at an annual taxable income of $126,000. At the same time, the benefit from the LMITO declines if a person’s taxable income is below $48,000 and disappears entirely for those with no assessable income.

This measure is expected to reduce the Government’s tax receipts by $4.1 billion (p. 16) and provide tax relief for over 10 million individuals. The measure has been enacted by the Treasury Laws Amendment (Cost of Living Support and Other Measures) Bill 2022 passed on 30 March 2022.

Permanence issue

John Maynard Keynes, the namesake of Keynesian economics, proposed that while governments should cut tax to stimulate the economy during recessions, stimulus measures should be temporary. Once recessionary pressure eases, governments should aim to run a balanced budget or even surplus during normal or good times.

The Treasurer has said that the ‘temporary, targeted and responsible cost of living package’ will ease pressures for Australians. A potential challenge, however, is how to end these temporary measures: as economist Milton Friedman once quipped, ‘nothing is so permanent as a temporary government program’.

While the measures are intended to be temporary, there is evidence of persistence in one-off payments. For example, tax relief provided by the LMITO has been brought forward and extended over successive budgets, and some of the Government’s COVID-19 stimulus measures (examples include the International Freight Assistance Mechanism and the Pandemic Leave Disaster Payment) have continued into the present notwithstanding that most COVID restrictions are already lifted. Several one-off social security payments have also been maintained over time.

The persistence of ‘temporary’ and ‘one-off’ cash injections into the economy has implications for inflation and inflationary expectations.

Inflationary concerns

At its most fundamental level, inflation, particularly ‘demand-pull’ inflation, is caused by ‘too much money chasing too few goods’. Rising inflation means the goods and services households buy will cost more, which manifests most directly as increased cost of living pressures.

When required, governments or central banks can inject money into the economy hoping it will stimulate productivity growth and lead to more goods and services being created over the long term. The theory is that more goods and services in the economy eventually moderates inflationary pressures and dilutes the level of debt compared with the size of the economy.

However, if the injection of money fails to stimulate productivity growth or leads to the creation of more goods and services, then it may exacerbate inflation, because more money is chasing the same amount of goods and services.

2022–23 Budget measures and inflationary pressures

Many commentators have warned of the dangers of ‘fiscal rocket fuel’ in the 2022–23 Budget, expressing concerns that ‘handing out billions in one-off payments’ will exacerbate inflation in Australia. Some commentators and forecasters have tipped faster Reserve Bank interest rate rises as a result.

The concerns are heightened in the context of other inflationary pressures and warning signs. The Government’s current expansionary fiscal policy is continuing off the back of the significant stimulus spending in the past 2 budgets—or as the Age puts it, ‘pandemic stimulus out, but election stimulus in’—and the Reserve Bank’s expansionary monetary policy of ultra-low interest rates and quantitative easing.

These cost of living payments coincide with significant improvements in the macroeconomic outlook that point to a strong economic recovery following the COVID-19 induced economic downturns. Analysts at Deloitte Access Economics believe ‘Australia’s economy is well past the point at which additional stimulus is needed’. Concerns had already been voiced in 2021 about the growing risk of over-heating in the construction sector in response to the massive COVID-19 stimulus.

Against this backdrop, the Grattan Institute has warned that the quantum of spending on the cost of living tax offset and welfare payments in the current inflationary environment is ‘bigger than the Rudd government’s first fiscal stimulus package for households during the global financial crisis’.

Not all economists share the fear this Budget will drive inflation, and for its part, the Government has argued that Australia’s current inflation is ‘driven, according to Treasury, largely by international factors’ and is expected to moderate. The Treasurer and the Minister for Finance have further argued that as higher petrol prices directly drive inflation, the temporary cut in the fuel excise will decrease inflationary pressure, with the Treasurer stating that ‘our cut to the excise will reduce the inflation rate by a quarter of a percentage point’. The Civil Contractors Federation had called for the fuel excise rate to be cut to provide at least partial relief from the immediate inflationary pressures in the construction sector.

Short term relief vs long term economic growth

The Government’s cost of living package will provide temporary relief from inflation in the short term.

Budget critics have pointed to a lack of reforms to drive significant productivity growth, which is needed if economic growth and incomes are to outpace inflation in the long run. Some of the long term economic challenges in Australia include productivity growth slowdown, tax system inefficiency and rising wealth inequality.

Australia is facing challenges regarding 2 out of the 3 major drivers of economic growth (namely ‘productivity, population and participation’). Commentators have argued that rather than expanding tax relief, structural fiscal reform is needed to tackle Australia’s productivity challenge and boost economic growth over the long term.

Economists have questioned the productivity and wage forecasts in the Budget, saying they are optimistic and create ‘an unrealistically rosy outlook’ that could mask the need for enduring policy reforms.

At best, cost of living measures in the Budget will provide short term relief from the effects of inflation without contributing to inflationary expectations, and the Treasury’s productivity and wages growth forecasts will be borne out. However, in a worst case scenario, these measures may exacerbate existing inflationary pressures, while the lack of productivity-boosting reform initiatives may see a return to the pre-COVID-19 trend of anaemic productivity, economic and wages growth.


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