In these deeply uncertain economic times of crisis, there is only one certainty: Finance Minister Jim Chalmers will not take responsibility for the problems that arise. Under his watch.
This week’s new inflation figures show that while the rest of the world is bringing inflation down, Australia is now seeing it rise. Opposition Leader Peter Dutton made the point in parliament this week, rattling the list of developed countries around the world with lower inflation rates than ours.
Rising inflation in Australia has prompted the Reserve Bank (RBA) to consider raising interest rates when it meets again in August, and possibly the month after.
A growing list of economists is beginning to argue that proposed rate cuts ahead of the next election could now be replaced by a series of rate hikes.
It is hard to imagine that the Prime Minister is happy with the performance of his Treasurer.
It’s hard to imagine Prime Minister Anthony Albanese being satisfied with the performance of his finance minister given the current direction of the economy.
Labour MPs were told Chalmers had the economic answers for the period leading up to the next election.
At its heart was a budget that would walk a fine line between austerity and overspending, leading to falling inflation and falling interest rates, just in time for an election campaign.
The theory goes that the Labour Party could campaign on its message of surpluses and win a second term on the back of strong economic policies.
Chalmers doubtless saw it as his ticket to the Labour leadership one day later. Now he would have difficulty simply holding on to his current role. After all, it is granted at the discretion of the prime minister.
Instead of inflation falling, it rises again, perhaps followed by higher interest rates.
The idea of early elections later this year should certainly be put on the back burner now, if not off the agenda altogether.
Anthony Albanese doesn’t want to take the risk of a rate hike during the campaign.
It is a difficult dilemma for government economic policy makers
To make matters worse, the Productivity Commission today confirmed that national productivity has not improved one bit over the past 12 months. There had been a deterioration in the previous 12 months.
And it’s no wonder, as Employment Relations Minister Tony Burke continues to throw sand in the gears of the industrial relations system, making it harder for employers to hire.
Wage increases that the government likes to crow about therefore take place without any improvement in productivity.
People get paid more, but companies get nothing in return, except higher costs. As a result, consumers have to pay more.
The wage increases that the trade union movement and the government are constantly implementing, in combination with the expenditure in the budget, also have an inflationary effect.
When the tax cuts come in July, they too will fan the flames of inflation.
If interest rates do indeed rise, as is currently speculated, everyone with a mortgage will see their tax cut disappear before their eyes.
And because the Labor Party has revised the tax cuts (breaking an election promise), they are even more inflationary than they already were.
But none of this is the treasurer’s fault, we are told. Because he keeps claiming that his budget was deflationary and to be admired. Even though most economists have been critical of the way he put it together.
His argument exists in an alternate universe without reality.
In her latest press conference, the RBA Governor essentially said that if interest rates rose further, it would be a sign that the RBA had given up on the possibility of a soft economic landing.
In other words, a rate hike later this year is a sign that the RBA has reached the point where it sees even the risk of a recession as a necessary evil to get inflation back under control.
What does that say about the government’s decision-making to take the risk of rising inflation with its policy settings? It means that the recession will be their burden and responsibility to bear.
Keep in mind that Australia has been in recession per capita for five consecutive quarters, saved from a technical recession by skyrocketing immigration that has only fueled the housing crisis.
The only reason further rate hikes risk triggering a recession is because the government has stimulated the economy when it didn’t intend to.
I have written before about the fact that there is no easy way out of an inflation cycle. Pain is a necessary ingredient. People will not like it, but it is better than the alternative of prolonged high inflation.
The government simply hoped not to have to agree to pain to reduce inflation. Instead, they hoped that inflation would continue to fall naturally, even as they spent money on targeted spending and tax cuts that had the opposite effect.
Economists across the country are now thinking, “I told you so,” as they watch the treasurer try to talk himself out of responsibility for what’s happening.
Economists across the country are now thinking, “I told you so” as they watch the Treasurer try to talk himself out of responsibility for what’s happening in the real world
Could have been better
What could Chancellor of the Exchequer Jim Chalmers have done differently had he shown political courage and economic understanding of the situation Australia found itself in?
He should have made the surplus bigger. A bigger surplus would have taken the pressure off government spending, reducing the inflationary impact on the economy. Chalmers was happy to settle for a surplus for its political value, rather than making it a meaningful surplus that would have had economic value.
All those cuts on housing and energy should never have been given, despite technical attempts to hide their impact. Instead of taking away the increase in spending that we saw during the pandemic, it is allowed to work it into the budget.
Even the legislated Stage Three tax cuts could have been delayed. If that had happened, they would have had no bearing on the next round of RBA decisions on rates. It would also have allowed the Labor Party to recalibrate them only after they had secured another election victory, thus avoiding their broken promise.
And instead of pushing the Fair Work Commission to lift wages above the inflation rate, it should have called for wages to be suppressed long enough to bring inflation down to below three percent, where this would help drive rates down rather than continuing to risk pushing them north. .
I understand that it is politically difficult to make these kinds of decisions. Unpopular and everything they would have been, no doubt. Particularly with the Labour base.
But that is precisely what leadership is all about. Being prepared to make difficult decisions in the interest of the country, even if they lead to the loss of political skin.
That hasn’t happened and as a result, things will get worse before they get better.