Government forecasts are overly optimistic. The CPI peaking at about 6 per cent until mid-2023 is the legacy of the fiscal overcompensation for COVID-19.
, the Reserve Bank forecast that inflation would be only 2.75 per cent in the June quarter of 2023. The Treasury’s latest forecast in the pre-election economic and fiscal outlook was only slightly higher at 3 per cent.It was good fiscal policy for governments in advanced economies to compensate the private sector for its income losses.
Of course, if the government had done nothing, private incomes would have been weaker than normal under COVID-19. Specifically, real private income would have been 5 per cent below normal instead of 6 per cent above normal. Thus, the Australian fiscal response conferred on the private sector about $2 in compensation for every $1 of income lost to COVID-19.
JobKeeper deserved support, but it should have been better targeted to reduce overcompensation, not broadened and extended, as suggested by Labor.