Big government is still the issue on inflation horizon

Labor ministers were pleased with Wednesday’s cost-of-living figures, as if they were a reason to re-elect them. The hard economic reality is that the improvement occurred despite the Albanese government, which is embedding inflation through unproductive public spending.

The Australian Bureau of Statistics reports the “trimmed mean” inflation figure was 3.2 per cent for the year to December, a touch lower than in October and closer to the RBA’s preferred band. The headline rate was lower, at 2.4 per cent annualised to December, the lowest CPI increase since the March quarter in 2021, when government Covid payments kept the economy afloat.

It is a Labor dream for an election win that the RBA will start cutting interest rates at its February meeting. Voters will be grateful for government “cost-of-living relief” that has artificially suppressed the headline rate of inflation. And everybody will hear the government’s message that more people are in jobs – the annual unemployment rate was unchanged at 4 per cent in December, despite the workforce expanding nearly 3 per cent. And just in case voters are still unhappy, Finance Minister Katy Gallagher told ABC RN radio on Wednesday the government was “mindful” of economic conditions and whether there were responsible decisions that can be made to “assist households”. After selective spending to cut the cost of rents, power bills, childcare, even university graduates’ study debt, it is hard to imagine what else could be subsidised, but you can bet ministers are working on ideas for the election.

The problem for the government is families remember the lived experience of inflation, not statistical abstractions. The price of a domestic holiday was up nearly 6 per cent in the last quarter. Services inflation – notably insurance, rents and medical care – increased nearly 9 per cent in the second half of last year. Even some of the supposed good news in the December figure signals hard times ahead. The ABS reports the price of new homes was down 2 per cent, due to builders responding to weak demand.

Anthony Albanese said on Monday his government had “done all we can” to reduce inflation. Except that he has used public money to subsidise household costs, which guarantees they will continue to rise to soak up all available funds. Jim Chalmers said on Wednesday lower inflation had not come at the cost of increased unemployment. Except that government is doing more of the employing. In the September quarter, public sector jobs grew by nearly twice the rate in the wealth-producing, productivity-improving private economy. And even with the taxpayer-funded cash splashes, opposition Treasury spokesman Angus Taylor warns we have been in a “household recession” for nearly two years.

The risk we face is stagflation, when growth in public spending to create jobs and artificially reduce cost increases will suck resources out of the productive economy and embed inflation. Once started, stagflation is very hard to stop, as Australia learned in the 1970s and ’80s. Things aren’t looking flash now either. According to the Mid-Year Economic and Fiscal Outlook, GDP grew 1.4 per cent in 2023-24 and will grow just 1.75 per cent in 2024-25 – and this when we have close to full employment.

Disruptions to the global economy caused by Covid started our inflation problem; the remedies of Mr Albanese, Dr Chalmers and Ms Gallagher risk turning it into its evil twin. To stop stagflation they need to stop soaking up resources the private sector can use to grow the economy.