Election v emergency: Jim Chalmers faces collision between budget politics and economics

Treasurers rarely shoot from the hip.

They know that anything they say is parsed down to the syllable – not just by financial markets but also by their own MPs, their political opponents and the economic press.

Treasurer Jim Chalmers and Finance Minister Katy Gallagher. The balancing act between budget responsibility and political imperative is increasingly difficult.Credit: Alex Ellinghausen

So when Jim Chalmers used his opening comments at a press conference on the national accounts this week to signal a change in budget direction, it grabbed the attention of a lot more people than the handful of journalists listening to him in parliament’s Blue Room.

Ever since he and Finance Minister Katy Gallagher took the reins of the Albanese government’s economic and budget policy, Chalmers has been resolute about bringing inflation down.

In his first budget speech, the first by a Labor treasurer in almost a decade, Chalmers said the aim was to “limit growth in spending, especially while inflation is high”.

But on Wednesday afternoon, after figures showed the economy barely growing by 0.2 per cent through the final three months of 2023, Chalmers used his press conference to signal change in the government’s budget message.

“Addressing inflation is still our primary concern, but these numbers show that the balance of risks in our economy are shifting from inflation to growth,” he said.

“Those first two budgets were carefully calibrated to the economic conditions, and that will be the guiding principle behind the third budget that Katy and I hand down in May.”

The national accounts revealed that for the past three consecutive months, GDP per person has been falling. That hasn’t happened since the recession of 1982-1983. If it wasn’t for population growth, the economy would have contracted.

Much of that population growth is due to international students returning to complete their Australian studies. According to NAB’s economics team, those students accounted for more than half of the growth experienced in Australia last year.

The national accounts covered the December quarter, during which the Reserve Bank took the official cash rate to a fresh 12-year high of 4.35 per cent in a move it said was aimed at subduing demand in the economy.

Since then, the economic news has not improved. The most worrying development has been the jobs market, with the unemployment rate back above 4 per cent for the first time in almost two years.

In a sign of the impact of the RBA’s interest rate settings, the state with the nation’s largest mortgages, NSW, is now experiencing a fall in the number of people with full-time work.

Data from the RBA this week showed another step up in the amount of credit card debt accruing interest rates. Spending with credit cards is growing faster than retail sales, an indicator that Australians are using expensive short-term debt to paper over their cost-of-living pressures.

And the latest monthly inflation figures, showing a small fall in January, suggest price pressures are easing much faster than the Reserve Bank expected.

Combined, these figures are the political cover for Chalmers and Gallagher to, if not abandon their focus on measures to reduce inflation, turn their budget gaze toward measures to support the economy.

But respected independent economist Chris Richardson said that ignored the whole basis of economic policy in this country.

He said the nation’s politicians, by giving the Reserve Bank independence – and an inflation target – in the early 1990s, had given day-to-day management of the economy to the central bank.

The government’s job was to set long-term policy to improve the economy’s overall performance. It should only step in during an emergency, such as the COVID pandemic or the global financial crisis.

“But this isn’t an emergency, this is an election,” he said. Richardson said while voters may demand immediate action from the treasurer and government on the economy, it was the Reserve Bank’s role. “It’s just not the treasurer’s job,” he said.

KPMG chief economist Brendan Rynne said the national accounts confirmed the government-spending-to-GDP ratio had become entrenched at 27 per cent rather than the pre-COVID level of 22-23 per cent.

“So any suggestion of fiscal stimulus to kick-start the economy is the wrong policy solution,” Rynne said.

Economist Chris Richardson says it’s the job of the Reserve Bank to fine tune economic policy, not the government.Credit: Louie Douvis

“Rather, given inflation is tracking down faster than anticipated, wages growth has peaked and now appears to be easing and the labour market is now shedding excess workers at greater rates, the need to maintain the currently (relatively) tight monetary policy settings is quickly evaporating.”

As this masthead revealed this week, there is tension between the government’s economics team – Chalmers and Gallagher – and those ministers who want to spend.

It’s a story as old as government, but the fact the complaints by those with spending plans burning a hole in their pockets became public says plenty about the growing pressure on Chalmers and Gallagher to loosen the purse strings despite the obvious dangers to the budget and broader economy.

While Chalmers was setting out important markers about the direction of budget policy, he also sounded a warning about the budget bottom line.

“We also expect that a slowing economy will have implications for revenue, meaning smaller revenue upgrades than we have become accustomed to in the budgets that we’ve handed down so far,” he said.

There have been wild swings in the state of the budget over the past five years.

When the Liberal Party was selling “back in black” coffee mugs in 2019, then treasurer Josh Frydenberg was tipping a string of budget surpluses built on strong revenue growth.

Then-treasurer Josh Frydenberg poses for photos with budget documents in 2022.Credit: Alex Ellinghausen

In the 2019-20 budget, when Frydenberg famously declared the budget was Australia was “back on track”, he was expecting to collect $486 billion in taxes over the next 12 months with $514 billion forecast the following year.

Bushfires and COVID upended those projections. By mid-2020, Frydenberg was forecasting to collect just $425 billion in tax and then $414 billion in the 2021-22 financial year.

Over a four-year period, COVID and the fires wiped the best part of $300 billion in forecast revenue with economists and Treasury expecting the pandemic to lead to a huge economic downturn, high unemployment and stagnant wage growth.

But a combination of government and central bank stimulus, and scientific breakthroughs, meant COVID did not destroy the economy. It also failed to wipe out the budget – the expected $300 billion collapse in revenue actually never occurred.

And the revenue has kept on rolling, helping Chalmers and Gallagher to deliver the first budget surplus since 2007 with another likely this financial year.

Since Frydenberg’s last budget and the most recent mid-year fiscal update, the improved economy has delivered almost $500 billion in extra revenue.

Plenty of pundits claim this extra cash is all about higher commodity prices. But that ignores the much stronger-than-expected jobs market that, combined with the lift in wages, has also delivered plenty of extra cash to Canberra.

During the depths of the pandemic, the government was expecting workers this year to hand over $247.3 billion in income tax. Now, it’s tipping $328.3 billion.

That’s an $81 billion boost in one year thanks to a strong jobs and wages market. Yes, high-priced iron ore and coal has helped improve the budget, but much of the effort has been done by Australian workers.

And that’s where Chalmers’ language is pointing to both the economic and political issues ahead for him and the government.

The improvement in the budget and the tearaway jobs market have been the government’s strongest economic arguments since taking office. Neither can be relied upon over coming months.

Chalmers will give a pre-budget speech to the Committee for Economic Development of Australia next week when he will, again, used prepared remarks to lay the groundwork for a change in policy direction.

Every word will be worth reading carefully.

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