Failure to face economic reality

The Albanese government attempted to escape facing economic reality this week thanks to smoke-and-mirror claims on inflation and floating simplistic solutions to housing costs. It won’t last while Anthony Albanese avoids getting on with governing to expand the economy. The headline inflation rate for August was 2.7 per cent, down from 3.8 per cent in July. This appeared good news, with inflation apparently in the Reserve Bank’s 2 to 3 per cent target band for the first time in three years. It isn’t. The headline rate was in considerable part the result of a contrivance.

The first of four $75 electricity bill rebates for households drove power prices down by nearly 18 per cent, and without that government gratuity power costs would have been stable at best and the real inflation rate higher. Unsurprisingly, the RBA knows this. Real inflation is still above its target zone, the rate the economy can live with without distorting growth and eroding savings. RBA governor Michele Bullock responded to the government’s inexpert artifice by leaving interest rates unchanged at 4.35 per cent and warning inflation was not contained. As policy editor Tom Dusevic writes on Saturday, the RBA is playing the leading role in short-run economic management. Ms Bullock is in the policy driver’s seat while inflation is the main game.

Jim Chalmers is having us on in announcing good news on inflation because when volatile price movements are stripped out it did not move much, down just 0.4 per cent. Just as he does by suggesting increased federal government outlays are expanding the economy. It is no disrespect to the Australians who benefit from increased outlays on health and aged care, welfare and National Disability Insurance Scheme payments plus public sector salaries that they are the beneficiaries of economic growth, not its creators. The government also had a go at diverting voters’ attention away from the causes of the national housing shortage by not sealing nonsense ideas that come from the Greens – such as capital gains tax reform and the end of negative gearing – in a lead-lined box and mailing it to political oblivion. Instead of addressing labour shortages, union interference, state and local government obstruction and inflation-created construction costs, the Prime Minister and Treasurer batted away news that negative gearing and capital gains tax were live issues among policy planners. This was too cute by half. They may not be policy now but they could be if the government decides there is enough political appeal in blaming small investors, many now looking for a refuge from inflation, to reduce rental stock through higher taxes. On the government’s form to date it may well decide to adopt a lighter shade of Green rather than doing what needs to done – the slow boring through hard boards that constructs houses and builds successful governments.

The government’s structural economic problems – entrenched inflation, stalled productivity, especially in housing, and structural deficits in state and national budgets – cannot be quickly fixed but it will take longer than it would have if Labor had not abandoned one of the Coalition’s few nation-building economic reforms – the stage three tax cuts. Funding increased public spending by borrowing and bracket creep is unsustainable, but this is what will occur as more and more workers have ever increasing amounts of their PAYE income taken in tax. Certainly, the tax base must include more efficient and equitable imposts. As a way to distort housing markets and delay, indeed deny people’s life choices, state government reliance on stamp duty when people buy a home is impossible to beat. But new taxes piled on the existing base would solve nothing; whatever government collects it will spend and then cry for more.

To energise the economy, the biggest tax problem must come first, and that means flatter and fair income tax rates (the Greens rarely, if ever, mention that the top 10 per cent pay 50 per cent of income tax). The government cannot do this alone and it is up to the opposition to stand up with policies of its own to accomplish reform.

The parties of government need to hammer out unity tickets on reforms – as occurred this month, albeit only after a great deal of careful debate, on aged-care funding. Whoever does it, and how, tax reform is essential to the economy. The unedifying alternative is what we now get from Mr Albanese and Dr Chalmers – namely, policy impersonations of Mr Micawber dissembling about the data and hoping something will turn up. Without tax reform to increase productivity, it won’t.