PETER VAN ONSELEN: America is about to provide stunning proof that Albo and Jim badly botched Australia’s inflation crisis. And their soft ‘people pleaser’ approach is only making it worse for every single one of us

Last week’s news that inflation in the United States has fallen – and is now right in the middle of the 2-3 percent range that the Reserve Bank of Australia would like to see for our inflation rate – is evidence that making tough decisions ultimately pays off.

Therefore, US interest rates are also expected to fall this week.

That’s not something we’re going to see here in Australia before the next election, no matter how hard the Finance Minister tries to pressure RBA Governor Michele Bullock.

Why? Because our inflation rate is well above the RBA’s target and there is little sign that it will fall significantly enough to allow interest rates to be cut, thereby easing pressure on struggling households.

That is the case no matter how much former Chancellor of the Exchequer Wayne Swan whines about why the RBA needs to cut rates before inflation is under control, he is simply cheering on his former political staffer and now Chancellor of the Exchequer, Jim Chalmers.

US interest rates are actually higher than ours because when inflation was too high there, the central bank did the right thing to prevent too much inflation from occurring.

By raising interest rates more than we did.

That’s exactly what’s happened here: entrenched high inflation, partly because our rates should have risen further north than they initially did.

Once under the Morrison government, during the 2022 election campaign, and a dozen more times since Labor was elected.

But inflation is also too high, because government spending is now only adding to inflationary pressures, making it even harder for the RBA to cut rates than it otherwise would have been.

The RBA conundrum was clearly seen when the latest national accounts were published, which showed Australian government spending growing seven times faster than the economy.

Think about how unsustainable that is.

No responsible RBA governor can recommend cutting rates in an environment like that, when unemployment remains low. And certainly not when he is also being bullied into doing so by the current Chancellor’s old boss.

That’s why it was irresponsible of Chalmers to also attack the RBA, saying it was responsible for ‘crushing’ the economy. By claiming that higher-than-ideal rates caused the damage.

Those percentages are not even at the level of comparable countries like the US, and as a result, our inflation is not falling as it is in America.

There is no painless way out of a period of high inflation.

Governments essentially have two near-binary choices, if they don’t just close their eyes and hope for the best:

1/ Tackle the problem head-on by using interest rates to stop high inflation, and accept the short-term pain that this brings.

Or,

2/ Pretend that you can painlessly massage your way out of the high inflation crisis by not doing enough to address the symptoms of the problem—in fact, by making it worse with government support and inflation-fueling spending—so that there is less pain in the short term but the problem lasts much longer.

Whether it’s a lack of economic credentials and training (Jim and his finance team have none) or misplaced ideological dogma (they seem to have plenty of both), Labour has opted for the latter option: inflicting long-term pain on voters without it being too acute.

That is precisely why Australia still has an inflation problem while other parts of the world no longer do.

While the timing of the next election may not suit Labor – Albo and his team would rather see interest rates fall before the campaign than remain stubbornly high – the timing is actually worse for the rest of us.

That’s because an election campaign in the current tense political climate inevitably involves our politicians trying to buy votes with big spending plans.

That in turn will put more upward pressure on inflation, making it even harder to get it back to the RBA’s 2-3 percent range after the election.

The Labour Party is certainly giving such signals. Although the coalition is taking strict financial measures, it is likely that after the campaign has started it will have no choice but to try to match (or even surpass) the Labour Party’s spending marathon in its own fight for votes.

Where are we now?

Unfortunately, this only applies to one thing: regardless of who wins the next election, Australia’s poor economic conditions are likely to continue.

And as opinion polls point to a parliament emerging in which a majority cannot be achieved, the role of the Greens in the policy-making process is likely to increase rather than decrease.

Every Australian knows only too well that the Greens advocate much higher spending than either major party has ever done. They also propose higher taxes, which risks further stifling an already bloodless economy.

To negotiate and secure Green support for a minority government, the largest party that succeeds will have to spend more than it committed to during the campaign.

All of this is why high inflation is likely to persist unless the economy actually collapses.