ALP veers left to suit Bandt but inflation is the real test

As Anthony Albanese looks ahead to next year’s election, due by May, he goes into the summer break buoyed by the passage of legislation through the upper house on Thursday. It was a successful end to the parliamentary year for the government. On the downside for Labor, its hardest economic and policy challenges – living costs, elevated interest rates and inflation – were underlined on Thursday night by Reserve Bank governor Michele Bullock at the Committee for Economic Development of Australia dinner in Sydney.

On Wednesday, Jim Chalmers talked up the latest inflation figures, emphasising that federal and state power bill rebates had delivered a record reduction in electricity prices in October, bringing headline inflation to 2.1 per cent – “a third of the 6.1 per cent we inherited”, he boasted. The fall in headline inflation, Ms Bullock said in her speech, was a relief for everyone feeling the pinch from rising living costs over the past two years, especially the most vulnerable people in the community. But consistent with the RBA board’s position on monetary policy, underlying inflation – leaving aside temporary factors such as electricity rebates and declining fuel prices – was still too high, she said. The latest Bureau of Statistics figures show it was 3.5 per cent in the 12 months to October, well outside the central bank’s 2 to 3 per cent target range.

Monetary policy settings, she said, “will nevertheless need to remain restrictive until the Reserve Bank board is confident that inflation is on track to return sustainably within the target range and approach its midpoint of 2.5 per cent”. The bank’s forecasts “suggest that a sustainable return to target will occur in 2026’’. If inflation is not brought down in a sustainable way, Ms Bullock warned, cost-of-living pressures would compound, and monetary policy would need to be restrictive for longer.

For the Prime Minister, Peter Dutton and the Treasurer, living costs, inflation and interest rates will be potent campaign issues over summer and in shaping election policies in the new year. With the federal budget heading into deficit as tax receipts and mineral royalties fall after back-to-back surpluses, both sides must show an ability and determination to tackle government spending, including the structural deficit, and implement productivity reforms. A “small target approach’’, comfortable as that may feel for politicians of both major parties, will not cut it when the nation has reached such a serious economic crossroads.

Swayed by the need for Greens support, some of the legislation rammed through on Thursday, unfortunately, involved significant spending and questionable decisions. That includes the Future Made in Australia package, from which the funding of coal and gas projects was ruled out – a sign, Greens leader Adam Bandt bragged, that “pressure works”. Not in helping the national interest. At the Greens’ behest, the government also agreed to fund $500m in upgrades for social housing, including electrification. At a time when a burst of warmer weather has shown up the power grid’s vulnerability, excluding gas will be detrimental to quality of life and business.

In return for supporting Labor’s overhaul of the RBA’s structure, the Greens pressed for the government to retain two aspects of existing legislation that Dr Chalmers, wisely, had wanted to scrap. That is, the never-before-used power of treasurers to override RBA monetary policy decisions and the RBA’s power to direct commercial banks’ lending to certain sectors. Retaining that power, the Greens claim, would allow the RBA to direct credit into “desirable” areas, such as renewable energy. After their irresponsible performance, the less sway the Greens have post-election the better.