We are now in a vaudeville economy where bad news is good news

Telstra workers are losing their jobs – almost one in 10 of them. That’s a big blow from a big business, with Treasurer Jim Chalmers calling it a “distressing day”. Yet, it’s just one gloomy story among many. As large as those Telstra losses are, more than 10 times as many workers became unemployed across Australia in the past month alone.

Then last week the government forecast that jobless queues are set to grow by yet another 60,000 workers. And after just five minutes of sunshine, wage growth is now falling (as those same government forecasts predicted it would), while surveys show families are deeply depressed about their finances.

Illustration: Simon LetchCredit:

Meanwhile, housing construction is at decade lows. That leaves it way below the government’s target, meaning it won’t make any sort of a dent in rents or house prices. In fact, pretty much anywhere you look there’s evidence that the big squeeze on family finances is starting to draw more blood. That’s pretty bad news.

Confusingly, it’s also good news. Here’s why.

Your cost of living soared as inflation surged well ahead of wages because inflation pushed you into a higher tax bracket, and because the Reserve Bank of Australia has been fighting inflation by raising interest rates. That says your cost-of-living challenges are the symptoms of the disease of inflation. So you really, really want Australia to keep winning the war against inflation.

And here’s the thing. At its simplest, we have an inflation problem because there are too many dollars chasing too little stuff. That’s why the RBA has been raising rates – it’s deliberately taking money out of the economy to chop inflation down further.

Yet to keep winning the war against inflation means keeping a close eye on the “too many dollars chasing too little stuff” equation.

Sadly, though, Australian governments are taking a gamble. While the Reserve is taking money out of the economy, governments have thrown the switch to vaudeville. Each of the federal, Queensland, Victorian and West Australian governments just unveiled big giveaways. (Queensland has an election coming, so its announcements were the most spectacular, stopping barely short of throwing in a set of steak knives.)

The politics are pretty obvious. In a cost-of-living crisis where families don’t have money but governments do, the pressure to help out is immense. So, in just six weeks’ time, Australian families will get truckloads of dollars – everything from tax cuts to electricity rebates, rent assistance and more.

But there’s a chance that our governments have overdone it. The money that’s about to arrive in your pockets is the equivalent of almost half the money that the RBA deliberately took out of your pockets.

The Reserve Bank has been stomping on the brake, but now our governments are hitting the accelerator. What could possibly go wrong?

Some may have the comforting belief that governments know what they’re doing. But I’ve seen them all up close for many years, and a better description is that they all fly by the seat of their pants.

And while a week may be a long time in politics, it’s the blink of an eye when crafting a budget. It’s likely the feds started making key decisions to juice the economy via their budget goodies as long ago as February. But they’ve been caught on the hop by the extra cash top-ups from the states, and by signs that the fight against inflation is getting harder.

So can the government gamble work?

Yep. The forecasts from the feds suggest we can have our cake and eat it too. We get our tax cuts, rebates and assistance, but we also get a rapid fall in inflation. And that is doable. But you may not be entirely happy if it does happen.

To make the juggle work means all the known good news on government money headed our way has to be offset by enough bad news on family spending. That’s why we’re in a bad-news-is-kinda-good moment.

It’s therefore good news for your mortgage that families are so worried about what happens next that they’re planning to trouser most of their tax cuts. If that happens, it would remove much of the inflation risk of coming months. Yet, remember families are currently spending 97¢ out of every dollar, so family spending may not be quite as weak as our governments are gambling it will be.

Best guess? There’s enough bad news on family finances that the good news on government goodies won’t push up interest rates any further. But it will be a long time before rates come down. Markets think the RBA won’t have enough wriggle room to cut rates for a year yet. That says the first rate cut would come five days before the most likely election date.

Chris Richardson is an independent economist.

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