Structural deficit must be fixed

As millions of Australians received taxpayer-funded power bill relief, headline inflation fell last month to 2.1 per cent – its lowest level in almost four years. That is unlikely to bring cuts in interest rates closer, with the Reserve Bank’s preferred gauge, trimmed mean (or underlying) inflation – which strips out the most volatile price changes – rising by 3.5 per cent in the 12 months to October. That remains well outside the central bank’s 2 to 3 per cent target and, as Jack Quail writes, marks an acceleration from September’s reading of 3.2 per cent. Taken in tandem with heavy government spending and rising consumer sentiment, that means the RBA is unlikely to cut rates next month.

Jim Chalmers, in his response, said the government’s back-to-back surpluses in its first two budgets were helping in the inflation fight. But a pre-election burst in spending and a drop in company tax collections are expected to cause a severe deterioration in the bottom line in next month’s mid-year economic and fiscal outlook. For the sake of Australians’ future living standards, as well as reducing inflation, the Treasurer and the Coalition need to look beyond immediate issues and produce election policies that will reverse baked-in spending, on and off-budget, to address the nation’s structural deficit.

While government revenue varies according to the strength of the economy and commodity prices, structural deficits are related to underlying economic conditions and factors such as the ageing population. They are not easy to address without a disruption in spending priorities. Both political sides need to show they are capable of doing so. As EY chief economist Cherelle Murphy warned this week, the ballooning growth of government debt would “close down options” for future governments.

In question time on Wednesday, Anthony Albanese showed no interest in changing his big-government care economy agenda, talking up the 15 per cent pay rise for early childhood education staff that future generations of taxpayers will be left to meet. Labor’s pre-election sweetener, wiping 20 per cent off tertiary student loans at a cost of $16bn, also will weaken the bottom line.

This year’s budget papers also set out billions of dollars more to be baked into the system, including $22.7bn across the next decade to fund the Future Made in Australia agenda. Amid difficult strategic circumstances, defence spending also will require a big boost, as will energy spending.

Deep spending cuts and higher taxes would be politically unpalatable, which is why, as HSBC chief economist Paul Bloxham says, the best way forward is to bolster the economy’s anaemic productivity. Getting states to cut red tape under national competition policy rather than employing more public servants would be a good start.