Retail politics is a poor substitute for productivity

With cost-of-living pressures front and centre in voters’ minds, Jim Chalmers has been given a big job to convince voters that Labor knows what it is doing.

The federal Treasurer opened his pitch on Sunday with a promise that the worst of the inflation problem was behind us and that voters could look forward to better economic days ahead.

Dr Chalmers followed it up on Monday with a scare campaign that Peter Dutton would undermine Medicare, push down wages and increase electricity prices. The government, meanwhile, will keep the spending taps open with a higher Youth Allowance and indexed pension payments, and the possibility of continued subsidies for electricity.

Dr Chalmers is spruiking $5bn in wage and welfare spending. Anthony Albanese, meanwhile, has been in a helicopter over a bushfire in Victoria, floundering on the details of extreme weather.

On the economic front the government must justify its big public sector spending that is crowding out small business, an area where there has been a spike in insolvencies.

Dr Chalmers said he was “proudest of what we did last summer to make sure everyone got a tax cut because that’s the policy which is doing the most good at a difficult time for people”. He said: “We’ve been planning and preparing for a soft landing in our economy, and that’s what economists are seeing as increasingly likely.”

This is all basic retail politics for a government that has found itself at odds with leading economists, institutions and markets on the core inflation challenge. Remodelling of the stage three tax cuts is being sold as a cost-of-living measure but it was a backward step on efforts to reform the nation’s tax scales to encourage enterprise and take some of the burden off pay-as-you-earn workers. What is left is a tax system that still punishes workers and rewards government coffers through bracket creep.

The energy rebate, another cost-of-living measure, has improved the headline inflation number but not in a way that is of any assistance to the Reserve Bank of Australia in its cash rate decisions. Voters still are likely to remember Labor’s broken promise that electricity bills would fall by $275 a year by 2025 under its policies.

Dr Chalmers’ big hope is that the RBA will start to cut interest rates before the election campaign begins. This is possible but not certain. After the RBA’s last meeting for 2024, governor Michele Bullock said: “We’re not saying that we’ve won the battle against inflation yet but we’re saying we’ve got a little bit more confidence that things are evolving as we think in our forecasts.”

The bottom line, however, is that the RBA board still assesses the level of aggregate demand is above the economy supply capacity even though that gap is closing. Ms Bullock said the board would be looking to the data across the next month or so to see if the economy and inflation continued to evolve as expected.

“The board needs to be confident that inflation is moving sustainably towards the target, and for this to occur we need to see more progress on underlying inflation coming down,” she said. An easing in wage pressures has improved the outlook.

The International Monetary Fund, meanwhile, has thrown its backing behind the RBA’s current restrictive monetary stance, labelling it appropriate and calling for support with fiscal policy “that avoids an expansionary stance”.

The IMF shares the hope that the RBA can engineer a soft landing but has warned against extensive public spending. But spending restraint was not a key feature of the federal government’s mid-year budget update, which points to higher borrowings and a string of budget deficits into the future.

For the election, Labor is calculating that voters will welcome any promise of better times ahead on the inflation and interest rate front. But, as national political editor Simon Benson has written, they are unlikely to be gracious in their assessment of the unprecedented erosion of their living standards.

Opposition Treasury spokesman Angus Taylor is correct to point out that productivity remains in free fall, GDP per capita has gone backwards for a record seven consecutive quarters, and interest rates have risen 12 times since Labor was elected in 2022. Productivity remains the challenge for both sides. An enduring turnaround in fortunes must include more than continued handouts from government.

We need a return to productivity growth together with tax and workplace reforms that encourage enterprise. This must be the real economic battleground for the election.