More government part of problem, not the solution

Jim Chalmers has made a brave political call that struggling households will thank him for keeping them trapped longer in a high inflation, high interest rate existence. A shorter and deeper downturn and quicker recovery is the alternative pathway taken by other nations.

Interest rates are heading down in Britain and New Zealand, and soon will be doing so in the US. Australia’s narrow pathway to avoid recession has been a joint project of the Reserve Bank and Treasury. But with a federal election looming, the Treasurer is starting to tell only half of the story.

The tension between Dr Chalmers and the RBA is a reflection that government spending is propping up overall demand but households are still doing it tough. It is, as Judith Sloan explains, a clear demonstration of Dr Chalmers’ failure to understand and manage the key trade-offs that are an integral part of the job of an effective Treasurer. Sloan writes that it is government spending that is keeping the economy from dipping into negative growth territory, but this spending is also contributing to the unacceptably high rate of inflation. Government largesse, most notably in health and the Albanese government’s favoured care economy, is helping to maintain a tight labour market, weakening the signals to the Reserve Bank that it can start to ease rates.

The kitchen table reality is we are starting to see a two-speed economy. The public sector is continuing to grow along with government expenditure and debt, while private companies struggle to compete with government for workers and manage the burden of regulation.

The Business Council of Australia says we are missing out on investment and economic growth because of increased red tape regulation, an inefficient tax system and uncertainty around project approvals. It says productivity is falling again, making the RBA’s task of returning inflation to target even more difficult. Companies are being forced to pay higher wages for no increase in productivity as a result of changes in industrial relations laws that are designed to deliver a more restrictive workplace that benefits the trade union movement. Those who have a job are paying an increasing share of their income as tax because of the impact of bracket creep and a failure of the political class to deliver genuine tax reform, including Labor’s cancellation of the legislated stage three tax cuts as they were originally designed.

Once you accept that bigger government is a large part of the current problem it is easy to understand that even more government intervention is not the elegant solution Dr Chalmers appears to claim it will be. The evidence is plain in Wednesday’s GDP figures, which show that Australia’s GDP expanded by 0.2 per cent in the three months to June, for an annual growth rate of just 1 per cent. This is the weakest annual GDP result since the end of the early 1990s recession outside of the pandemic. GDP per capita slipped a further 0.4 per cent, marking the sixth consecutive quarter where an increase in Australia’s population of about 2.5 per cent outpaced economic growth. The biggest single contributor to keeping the economy out of recession was general government final consumption expenditure – mainly social benefits to households – that rose by 4.7 per cent through the year.

Dr Chalmers says the outcome justifies the way Labor has “managed the economy responsibly” including by resisting “a lot of free advice” from commentators to cut harder and harsher in the federal budget. The Treasurer may claim to share the pain of those doing it tough but no amount of government subsidies and spending will be enough to dig them out of the hole that, with household savings now exhausted, many families find themselves in. To do that will require a keener focus on encouraging the productive economy rather than trying to use taxpayers dollars to spend our way out of a high inflation, low productivity reality.