bad for your budget, good for the government

0

But perhaps the most surprising thing revealed by the authors’ review of the budget documents is how, compared to pre-pandemic numbers, nominal gross domestic product is now expected to grow at a fairly rapid rate that real GDP.

Loading

Why should the nominal increase faster than the real? Clearly, because of a higher inflation rate. Remember, however, that this is inflation measured not as usual by the consumer price index, but measured by the “GDP deflator”.

Why would the two measures give significantly different results? Because our “terms of trade” had changed. If the prices we receive for our exports change at a different rate than the prices we pay for our imports.

Thus, the GDP deflator includes changes in export prices and subtracts changes in import prices, while the CPI ignores export prices but includes changes in retail prices of imported consumer goods and services.

We have made so much fuss about the bad news of rising import prices, such as gasoline and diesel, that we have forgotten that as a major exporter of energy and food, we are a net Beneficiary the effect of the war in Ukraine on world commodity prices.

With the added help of strong iron ore prices, our terms of trade improved over 12% in the March quarter to a record high. A record, and no one noticed.

But here’s the trick: your personal budget benefits only indirectly, if at all, from our booming exports. But it will bear the full brunt of rising import prices, which is the main reason why the cost of living rose 5% year-on-year and headed higher.

The Reserve Bank is confident that this year’s round of wage increases will be a little higher than last year’s, but it is increasing the cost of living for homebuyers by raising interest rates, to help ensure that wages rise far less than prices in the coming period.

Thus, recent developments are not good news for your budget, but good news for the Governments budget. Its turnover tends to grow in parallel with the growth of nominal GDP. And higher inflation means higher taxes.

Mining companies pay more corporate taxes, consumers pay more taxes on goods and services, and despite the continued decline in real wages, higher income tax collections, because any wage increase workers get pushes them into higher tax brackets or otherwise raises their average tax rate. Good news for some.

Ross Gittins is the economics editor.

The Business Briefing newsletter features top stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Share.

Comments are closed.