(Adds comments from S&P and Treasurer Chalmers in paragraphs 10-14)
Australia's government plans to spend billions to cut energy bills and rent, hoping to lower headline inflation and provide relief for voters grumbling about cost of living pressures ahead of an election next year.
In his third annual budget since taking office in 2022, Treasurer Jim Chalmers on Tuesday pledged more money for renewables, critical minerals and defence, alongside a long planned cut to income taxes by an average A$1,888 a year for each taxpayer.
"The number one priority of this government and this budget is helping Australians with the cost of living," Chalmers said in his budget speech to parliament.
"Annual inflation has more than halved from its peak in 2022 ... but we know people are still under the pump. That's why we designed our cost of living policies to ease these pressures."
The government estimates the proposed A$3.5 billion ($2.31 billion) in energy bill relief - equivalent to an annual A$300 rebate for every household - will reduce headline inflation by around half a percentage point for the fiscal year ending June 2025.
Treasury now expects an easing in inflation back to the central bank's 2-3% target band by the end of this year.
That would be a welcome surprise for the Reserve Bank of Australia, which was forecasting inflation to pick up to 3.8% by the year end from the current 3.6%, raising the risk of another interest rate hike.
The ambitious inflation projections come as Prime Minister Anthony Albanese's Labor government faces growing criticism over soaring consumer prices ahead of a federal election due by early next year.
However, analysts suspect core inflation could still remain sticky even with the extra cost of living relief, which also runs the risk of adding to spending later in the year.
Total revenue for 2024/25 is expected to be A$711.5 billion, while total expenses
are seen
at A$734.5 billion.
S&P Global Ratings said the budget measures could be mildly inflationary as it "slightly loosens the purse strings".
"Rent assistance or electricity rebates might be administered in a way that lowers measured consumer price index inflation, but they also put more money into consumers' pockets to spend on other goods and services," the ratings agency said in a note.
"Consequently, the 'last mile' of the Reserve Bank of Australia's (RBA) inflation fight could remain challenging," it said, adding it no longer expected RBA to cut its policy rate in calendar 2024.
Chalmers defended the budget, saying the cost of living measures will take the edge off inflation.
"I'm very confident in this budget that we're putting downward pressure on inflation, that we are being part of the solution to inflation rather than the problem," the Treasurer said in a post-budget interview with ABC News.
BACK TO DEFICIT
Other cost of living measures in the budget include an increase in the rent assistance programme and debt relief for students, as well as more investment to make medicines cheaper.
Investing in Labor's "Future Made in Australia" subsidy programme was the other big theme of the budget, with the government pledging to pour in more than A$20 billion over the next 10 years to help domestic industries compete globally.
It also includes hefty tax incentives for the production of renewable hydrogen and for the processing and refining of critical minerals, a market China dominates globally.
The government will also spend A$5.7 billion more in the next four years on defence - the largest increase in decades - as it upgrades its missiles, drones and warships to counter China's rising influence in the region.
All of that spending means the budget will swing back to deficit in the next few years after two straight surpluses on a strong labour market and high commodity prices.
The government projects a combined A$122 billion in the red over the four fiscal years to 2028, though that will still be relatively small at around 1% of gross domestic product on average.
The government trimmed its 2024/2025 GDP growth forecast to 2.0% from 2.25%, while maintaining its current year view at 1.75%.
It kept its long-term commodity price assumptions unchanged in the budget, with iron ore spot prices seen falling to $60 per tonne by the March quarter of 2025, and thermal coal prices to $70 per tonne. ($1 = 1.5131 Australian dollars)
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