Recapturing reform spirit in difficult economic times

As Jim Chalmers has acknowledged, recapturing the economic reform spirit of the Hawke-Keating era, as promised in the election campaign, will be no easy task. But it is essential that sound economic policy guide the ambitions of the new government as it seeks to deliver on Anthony Albanese’s pledge to change the nation.

It is a ritual for incoming treasurers that after taking office they seek advice from the nation’s major economic institutions, such as Treasury and the Reserve Bank of Australia, and reflect back to voters the gravity of the challenge they have been left by their predecessors. The Coalition made much of the budget black hole left by the Rudd-Gillard-Rudd years. It is stating the obvious that the black hole of debt and deficits left by the Morrison team as a result of emergency measures made necessary by the pandemic gives the Treasurer plenty to work with when it comes to managing expectations. After being briefed on the situation by the RBA and other financial bodies and regulators including the Australian Securities & Investments Commission, the Australian Prudential Regulation Authority, the Australian Taxation Office and the Australian Competition & Consumer Commission over his first days in the job, Dr Chalmers said there was no “mincing words” about the scale of the task ahead. He said he would be upfront about the “nature and magnitude” of the challenge as he worked to frame a revised budget for October.

Dr Chalmers is correct to say no new government can flick a switch and make $1 trillion of debt disappear or to fix overnight substantial issues that include skyrocketing inflation and falling real wages. Added to this is great uncertainty in the world’s major economies, where the inflation challenge has become more acute. Equity markets across the US, Europe and Asia have fallen to levels that suggest there is more disturbance yet to come, including the possibility of recession.

With high debt and large deficits already locked in, Australia has less flexibility to respond to another emergency such as a fresh outbreak of Covid-19 or another global financial crisis. Against this backdrop, the Albanese government has promised to deliver a suite of climate change measures that are much greater than anything attempted by the Coalition but less than what is being demanded by the Greens and teal independents. In addition, during the election campaign Mr Albanese and Dr Chalmers talked a lot about the rise of the caring economy, much of which is funded by the state in the form of the National Disability Insurance Scheme, nursing and universal childcare. What was less clear was the extent to which the care economy fell in the productive sector and how much should properly be allocated to the welfare spend.

Similarly, the new government and big corporations have jointly identified action on climate change as an economic opportunity. Left unsaid has been how the risk will be allocated between government and the private sector, and how the costs and benefits will be shared among the haves and have-nots in the community.

The promise to reinvigorate industry, particularly in the regions, looks good on paper but the challenge will be in delivery. Meeting the government’s climate change plans will require a huge allocation of capital that, in the first instance, will be used to maintain the status quo of a stable electricity supply but one with less greenhouse gas emissions. Becoming a renewable energy superpower will require overbuilding renewable energy capacity by as much as 600 per cent and is not risk free. Major corporations will be subject to a cap-and-trade carbon scheme with any increased cost of doing business logically passed on to customers in the form of higher prices, potentially adding to inflation. Meanwhile, unions will be demanding compensation for jobs lost to the transition and higher rates of pay across the board.

The new government starts its term full of energy and good intentions. The Prime Minister has delivered his climate pledge direct to US President Joe Biden, who has plenty of problems of his own in that area. The performance of Dr Chalmers and his economic team will be vital to Mr Albanese’s success and that of the nation. It is important that Dr Chalmers get fully across his brief and set a clear road map for what is possible under current conditions. The Keating legacy is a good one when it comes to shaking the nation out of complacency. Dr Chalmers will benefit from past Labor reforms including a floating dollar that can act to absorb some of the financial shocks that are outside of our control. His plan to better align monetary and fiscal policy is worthwhile but must retain the independence of the RBA from executive government. Dr Chalmers deserves encouragement to leave his mark and get things right as he takes on a difficult job in difficult times.