Jim Chalmers can’t walk both sides of sorry street

Federal Treasurer Jim Chalmers during a press conference on Wednesday. Picture: Nikki Short/NewsWire

There are two essential truths of a tanking economy that Jim Chalmers is struggling to explain.

Had it not been for the record levels of government spending, he would have to be accounting to the country for why it was in an actual recession and not just a household one.

On the other hand, it is this unprecedented scale of public demand – both state and federal spending – that is driving the household pain of the inflation problem to be longer than it needs to.

The Treasurer has yet to find a way to walk both sides of sorry street.

But a game of chicken with central bank boss Michele Bullock won’t end well, for anyone.

The longer this goes on, the more pain people are simply going to have to endure and the greater the political risk for Labor’s re-election prospects.

Whatever way the Treasurer cares to spin Wednesday’s national accounts, the numbers are dire.

The worst growth rate since 1986 outside the two recessions we have had since.

He can blame whoever he likes, whether it’s Vladimir Putin, Peter Dutton or the RBA board, but this can’t disguise the fact that the economy continues to go backwards for households because inflation continues to be the problem.

This is grist to the mill for the Coalition trying to build its case that it is the government that continues to contribute to it.

Economist Saul Eslake says there is obvious bad news and good news in the latest numbers, but the bad news probably outweighs the good.

It is now the seventh quarter in a row of negative growth per capita. Or eight out of nine.

Real household disposable income on the other hand began to tick up for the first time in two years, thanks to tax cuts and energy subsidies.

Eslake says that in terms of what it means for interest rates, the RBA would be pleased to have seen that some people have saved some of their tax cuts.

“Against that, the RBA will be surprised again by strength of public demand,” he says.

“They might say that some of it was temporary in terms of defence … but they will be surprised by the strength in that number. And the other thing they will be disappointed by is the continued abysmal productivity performance.

“The significance of that is that even though national accounts shows measure of wage inflation slowed to 2.5 per cent, which is more than the slowing of the wage price index, because productivity is so poor, unit labour costs which drives services inflation was 3.9 per cent and that is way too high to be consistent with inflation being back in the target range.

“So it’s one step forward and one-and-a-half to two steps backwards.”

Economist Warren Hogan is even less favourable in his judgment. He says the government fundamentally misread what was going on in the economy and was trying to solve the wrong problem.

He said the structural changes that the government intervention had produced were without precedent in his 30 years as an economist.

The government spending – both state and federal – is the highest as a share of the economy on record, and even higher than what was spent to save the economy from Covid.

This had crowded out the private sector to a point where the supply constraints are the major problem. Yet the government keeps stimulating demand.

“The problem is we are in a capacity constraint economy … we can only grow so much without putting pressure on inflation,” he says.

“The government says interest rates are the problem, when they are in fact the solution.

“And the fact we are just dragging out this adjustment on the narrow path to a soft landing is politically diabolical.”

How much longer Chalmers’ narrative that this is all in line with his strategy of a soft landing holds with voters is questionable.

There will be many voters that are still suspending judgment.

These numbers won’t help Labor’s case at all.