Smash or be smashed: Chalmers gambles on a rift with RBA

Jim Chalmers will be as blunt as he needs, as often as he needs, to make sure voters know he fears the economy will be “smashed” to a standstill by high interest rates.

The treasurer is utterly at odds with those in the Reserve Bank who say the economy is running a bit too hot – and he does not mind if Australians watch this argument live.

There is a simple way to sum up what is happening here: smash or be smashed. Households are angry about rising prices and higher interest rates. Chalmers wants to shield the government from their blame. That means reminding voters that some of this is the Reserve Bank’s fault.

Michele Bullock and Jim Chalmers are at odds about the state of the economy.Credit: Aresna Villanueva

The political tactic is transparent but risky. It is unusual for a treasurer to be so direct in blaming the Reserve Bank’s interest rate decisions for “smashing the economy” – as Chalmers did on Monday – even though it is a statement of the obvious.

Of course growth has slowed because the Reserve Bank has lifted rates 13 times since May 2022. Of course the economy might come to a shuddering halt if the bank lifts them again.

But Chalmers has sharpened his criticism to counter any hint that Australia needs another interest rate rise, even though Reserve Bank assistant governor Sarah Hunter said last month that demand was putting upward pressure on inflation.

“We’ve been in this sort of position where the economy is running a bit hot for a time now,” Hunter told a Senate committee.

In fact, Chalmers is preparing for official data on Wednesday that is tipped to show the economy has turned stone cold. The consensus among economists is that GDP growth will be as low as 0.2 per cent.

This means Chalmers feels vindicated in not cutting harder in the May budget, as the Coalition and some of his other critics wanted. His message to his colleagues is that slashing and burning would have sent the country into a recession.

But does this justify a public rift with the central bank? Independent economist Saul Eslake finds fault with the sharp language.

“I think it was an unwise, and in some senses unfair, thing to say,” Eslake concludes. He points out that Australians were largely protected from even harsher decisions on rates and growth.

While the central bank in Canada pushed rates to 5 per cent and the Bank of England went to 5.25 per cent, rates in Australia have stayed at 4.35 per cent. While unemployment has risen in the United States, it remains relatively low in Australia. This is the trade-off between fighting inflation and sustaining growth.

Reserve Bank governor Michele Bullock has avoided some of the more drastic steps taken overseas. In effect, she has tolerated some of the price pressures to avoid a deeper downturn. Eslake says Chalmers could have explained this dynamic.

Yes, he could have. But he did not. Again, the political imperative is obvious. The last thing voters want to hear right now is that they should be grateful things are not worse. It is wiser for Chalmers to acknowledge their pain, not wave it away.

The problem with a public blame game is that everyone can watch you playing. Shadow treasurer Angus Taylor faults Chalmers for not owning his decisions.

“This is a guy who is always looking for an excuse,” Taylor says. “If something goes well, he likes to take responsibility, and if something’s not going well, he says it’s someone else’s fault.”

The argument only opens up big questions for Chalmers and the government. What is their agenda for the coming election? Where are their next steps to revive growth without fuelling inflation? Taylor has yet to outline a Coalition economic plan of any significance, but that does not spare Chalmers from the task of setting out some big ideas.

Bullock is not biting, of course. The Reserve Bank governor sent a warning about government spending and inflation on August 6 and has largely held back since then. The challenge will be to manage questions about whether she agrees with Chalmers about interest rates.

Chalmers is not retreating from his remarks but he needs to be careful. Political leaders can suffer the consequences if they make too many assumptions about what a Reserve Bank governor should do. A previous governor, Glenn Stevens, stung John Howard by lifting rates a few weeks before the prime minister went to the 2007 federal election.

The hard-heads inside the federal government do not expect an interest rate cut this year, but some of them live in hope of a cut next year – just in time for an election due by May. Bullock and the Reserve Bank board have immense power to help or hinder Labor before polling day. One false move and someone might get smashed.

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