James Campbpell: The inflation genie is out of the bottle

The temptation for the Treasurer when he hands down the budget in a few weeks’ time will be to please the party’s hangers on - but tipping money into an economy with rising inflation is likely to be viewed grimly by the Reserve Bank, writes James Campbell.

Parents at St Patrick’s College in the northeastern suburb of Brisbane got a very unwelcome email from the principal last week just letting them know that due to “several external factors” there was a good chance the fees would be jumping 10 per cent next year and another 10 per cent the year after that.

Given Australian private school’s track record – in the decade to 2019 their fees rose by twice the rate of inflation - it would be easy to dismiss this as just another example of their greed.

Especially as the Reserve Bank is only predicting “CPI inflation to be around 7¾ per cent over 2022” and “a little above 4 per cent over 2023”.

On the face of it, to be asking – a year out - for roughly two-and-half times the rate of inflation is pretty good going.

But let’s assume for a minute that annual 10 per cent price rises are not just being driven by greed.

Let’s imagine they are being driven by a genuine expectation that we’ll all need 10 per cent extra a year just to stand still and that this becomes the new normal.

Jim Chalmers has to make decisions not just to please Labor mates but to secure a future for today’s youngsters.

In other words imagine most of us decide we just don’t believe the current price rises are a temporary effect of the pandemic and war in the Ukraine but instead act as though they’re here to stay.

In the not too distant past that wouldn’t have mattered much because there were enough unemployed or underemployed people around to make sure bosses had the whip hand in negotiations.

But even before the current inflation spike began, private sector wages were already rising at the fastest rate since 2013.

Add an expectation of rising prices to full employment and it’s hard to see we are going to avoid a spiral in wage-price inflation in the private sector.

What about the public sector? What’s happening there?

The answer is, it depends where you live.

Premier Dan Andrews during a tour of Orchard Grover Primary School. Picture: Kiel Egging

Here in Victoria the lid has been off for years.

As the Fin Review reported last year our public servants “earn more than $4800 a year above their counterparts in NSW, which has a higher cost of living due to higher property prices.”

Since Daniel Andrews came to power at the end of 2014 they have grown faster than any other state and territory.

But don’t worry Queenslanders, Annastacia Palaszczuk is doing her best to catch up!

Earlier this year the state’s nurses were offered 4 per cent a year pay rise over the next two years and then 3 per cent the year after that.

They’ll also be in line for an extra 3 per cent across the life of the agreement if the cost of living in Brisbane rises faster than the base which it probably will.

The states’ teachers have just been awarded a similar deal.

No doubt the coppers won’t be far behind.

Note to NSW readers: if you want this sort of stuff you’ll have the chance to vote for it next March.

It goes without saying that until the day before yesterday a 20 per cent pay rise – which is what it could add up to over three next years – would have seemed pretty good going.

But now we’re in the exciting new world of 10-per-cent-this-year-and-10-per-cent-the-next the complaints will soon start they’re being robbed.

Treasurer Jim Chalmers and wife Laura Anderson arriving at the Midwinter Ball at Parliament House in Canberra. Picture: NCA NewsWire / Martin Ollman

While we’ll soon see what the practical effect will be of the federal government’s stated desire to reintroduce pattern bargaining – personally I’m sceptical of how much impact it will have – the important thing to understand is that it’s intended to drive wages up.

In other words between the lack of discipline shown by state Labor Governments, labour market pressure and changes to the rules designed to drive wages up, the traffic is going to be all one way.

Which brings me to the budget to be delivered by Jim Chalmers in a few weeks’ time.

Although he’s been walking around with a face like a beaten favourite the past few weeks, Chalmer’s biggest problem in framing this budget is what he’s going to do with all the extra billions he’s going to collect in the next year or two.

That’s because inflation drives up taxation revenue through increased GST receipts, increased company profits and bracket creep.

He’s also going to have billions more coming to him because of the huge increases in the price of the natural resources Australia lives from.

Full employment will also help the budget because there will be less money going out the door in welfare payments.

To be sure government expenditure is exposed to inflationary pressure the same as everyone else’s and a number of its payments are index linked to CPI, but overall the Government will still have much more money to play with than was expected the last time the budget numbers were made public before the election.

The temptation for a Labor Treasurer will be to please the party’s hangers on by spending the lot.

But any extra money he tips into an economy with rising inflation is likely to be viewed grimly by the Reserve Bank.

It’s a problem, working out how to put the inflation genie back in the bottle.