January 18, 2024

What could the federal government do to ease cost-of-living pressure? The answer is complicated

By Rachel Clun
January 18, 2024 — 4.00am
, register or subscribe to save articles for later.

Save articles for later

Add articles to your saved list and come back to them any time.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers have been under sustained pressure coming into the new year over the ongoing squeeze on household budgets.

Inflation is still high – 4.3 per cent by November’s monthly measure – and the last Reserve Bank interest rate rise which took the official cash rate to 4.35 per cent was just two months ago.

This week, Albanese said the government was looking at ways it could help with the pressure on households and would make announcements ahead of the May budget.

Albanese and Chalmers face some tough decisions in the coming months.Credit: Marija Ercegovac

“I’ve asked Treasury and Finance to continue to come up with ideas in ways in which we can assist with cost of living, but without putting pressure on inflation,” the prime minister said on Triple M Adelaide on Wednesday.

But economists warn that giving people what they ask for means difficult decisions for the government.

“It’s true of any government around the world, they’d love to be helping, who wouldn’t love to help an electorate that’s hurting? The problem is, it’s really hard to do,” independent economist Chris Richardson said.

How could the government ease cost-of-living pressures?

The Labor government has already introduced a range of measures, including cheaper prescription medicines, increased Commonwealth Rent Assistance and JobSeeker, and $1.5 billion in energy bill relief for low-income households.

Brendan Coates, economic policy program director at the Grattan Institute, said the government could extend energy bill relief and increase rent assistance and unemployment benefits without injecting too much cash into the economy.


Help with the rent

“The top of that list really is rental assistance – they’ve raised it by 15 per cent, they should turn that into at least a 40 per cent increase,” Coates said, explaining it would cost about $1 billion and help about a third of the renters who already get assistance.

Cassandra Winzar, chief economist at the Committee for Economic Development of Australia, supports this idea, as well as lifting welfare payments including JobSeeker and the single parenting payment.

“They’re really helping out people who are having a very difficult time, but it is pretty targeted, and it’s not going to have significant inflationary impacts,” Winzar said.

The key is to make sure any relief is targeted to those who need the most support, Coates said. Given the government’s assistance would be focused on a small group of people who don’t have a lot of cash, it should have a minimal effect on inflation.

The stage 3 tax cuts, which will deliver concessions to everyone earning over $45,000, affect a much broader range of people and will have a larger impact on inflation. Coates says if those cuts were adjusted, the government could do more.

More bulk billing

Per Capita senior economist Margaret McKenzie said another option would be helping more with the cost of healthcare.

“I actually think they should fund bulk billing fully, that’s an obvious one,” she said.


Taking a different tack, Richardson said the government could temporarily cut import taxes which would encourage people to spend their money overseas.

He said while that would be economically sound – it would make imports cheaper, and money spent overseas doesn’t add to inflation at home – it would be a bad political move to discourage people from shopping locally.

“Good politics and good economics don’t always pull in different directions, but in this particular instance, they do quite a lot,” he said.

What could stop the government from doing it?

Households are still going to find it tough this year, but the economic picture is improving.

Inflation is expected to keep falling, the stage 3 income tax cuts will kick in from July 1, and most economists expect the Reserve Bank to start cutting rates in the second half of 2024.

But Coates warned that any extra money the government puts into the economy could change its trajectory.

It all makes inflation – and thus rates – worse

“The more that they spend to protect people from inflation and the cost of living, the greater they risk exacerbating the problem and leaving inflation higher for longer,” he said.

Winzar said getting inflation under control must remain the government’s top priority, despite pressure from the community for help.

“I don’t think we’re in an environment where we can do really big cost-of-living relief to all the community, and so it’s really targeting those doing it toughest and that’s particularly renters at the moment,” she said.

Richardson said it will be difficult to help ease cost-of-living pressures now without adding to them down the track through prolonged high inflation.

“The key challenge here is that voters think governments can do a lot. You know, the government’s realised themselves that they can only do a little, and they’ve got to navigate between those two things,” he said.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.

Rachel Clun is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.Connect via Twitter.


Leave a Comment

Your email address will not be published.