Anthony Albanese’s dilemma: how to sell a weak economy

The national accounts figures released this week are grim, but will it spur the Albanese government to reset policy – or is it locked into its flawed agenda?

Anthony Albanese and Jim Chalmers face two tasks – surviving the election and showing the economic model on which they have bet their futures actually works.

In early 2023 Jim Chalmers finished his 6000-word essay promising a “better capitalism” with superior values for all Australians – but two years down the track the latest data “paint a picture of a sad economy without much hope”.

It wasn’t supposed to be like this. The Treasurer’s trajectory has been derailed. This week’s national accounts confirm a judgment long in the making – living standards keep falling, economic growth is stagnant and the productivity to drive prosperity has disappeared.

The above quote on the latest economic figures coming from EY chief economist Cherelle Murphy is a devastating assessment on Chalmers’ legacy towards the end of Labor’s first term. It is lethal because it captures a reality and a mood. The data is deeply disappointing and the mood is community pessimism about the future.

Cherelle Murphy, chief economist at Ernst & Young Australia.

The unavoidable conclusion is that Labor has been waylaid by an inflation event it misjudged and, despite its efforts, a defective growth agenda that calls into question its ability as a viable economic manager in the decade of the 2020s.

Even more alarming is whether the Albanese government has the capacity to admit what has gone wrong and reset policy or is locked into a “more of the same” doubling down on its existing flawed agenda.

Since its 2022 election win Labor has been dedicated to sustained state power intervention while showing little grasp of the needs of private sector capital.

It seems beset by an old Labor bogy – a reluctance to tune policy from tax to industrial relations to environmental laws to regulation to bolster the confidence of private capital. Chalmers boasts about his reform agenda, as foreshadowed in his 2023 essay, but the question now being asked is whether this is the right agenda.

The stakes are huge. They penetrate both to Labor’s re-election hopes as the polls turn south and whether Labor, after its 2022 victory, can meet the historic task of successful social and economic management in the current decade.

There are three big narratives at work – living standards are falling; government spending is at record highs and is keeping the economy alive; and economic growth is weak, the result of higher interest rates and collapsed productivity.

Murphy said: “Never before have governments pumped so much into the economy via rebates, tax cuts, infrastructure, health and disability support and defence. But, as we have consistently argued, this level of spending won’t deliver macroeconomic stability and drive sustainable long-term growth.

“Interest rates won’t be eased while the Reserve Bank is concerned that inflation is above its 2-3 per cent target band within a reasonable time. Government spending is, in some areas, adding to inflation because it is causing the prices for goods and services to be bid up.”

This week’s figures won saturation coverage in both the up-market and tabloid media. GDP growth per capita – a measure of living standards – went backwards by 0.3 per cent, falling for a record seventh consecutive quarter.

The Daily Telegraph ran the story on page one under the heading “Recession of the People” – the popular media, print and television, is shouting about the statistics that verify how badly financially squeezed people have felt for the past 18 months.

While Australia is in a per capita recession, it has avoided a GDP recession. Economic growth was a weak 0.3 per cent in the September quarter and 0.8 per cent for the year, the weakest annual economic growth, the pandemic aside, since the early 1990s recession. Signs are that the worst is over and a consumption recovery is coming.

Economist Chris Richardson says in real terms living standards at the September quarter 2024 are 10.5 per cent below their artificial high three years earlier in the pandemic. But even measured against when Labor took office in May 2022 the decline is still 8.6 per cent, despite Labor’s efforts to protect people. Richardson says of living standards: “Their recovery was always going to be a long grind and today suggests it could be even longer still.”

People are worse off. This is not just a question that Peter Dutton will ask at the election. It is a fact. But it is also more than a fact – increased living standards was the central pledge Anthony Albanese made at the 2022 election.

Labor faces the embarrassment next year of a campaign where the government has failed to deliver its main commitment from its defeat of Scott Morrison. The Opposition Leader will cast that as a betrayal. What answer will the Prime Minister and his Treasurer offer?

Yet the national accounts further verify a trend apparent for some time – the defining feature of economic policy under Albanese and Chalmers is bigger and ever bigger government.

Chalmers offers a short-term defence, saying without such government spending the economy would be in a GDP recession. That might be true.

But it avoids the bigger story. Labor is being defined by a surge in government spending, federal and state, by an addiction to government intervention, more regulation and a deeper belief in state power. This story runs virtually across the spectrum of portfolios. It is the central organising principle of the Albanese government and it creates today’s dual economy: public sector strength, private sector weakness.

Richardson says government demand as a share of the economy now runs at 28 per cent compared with 24 per cent in 2016. It is now back to the brief emergency peak during the pandemic crisis.

Chalmers knows he must qualify this trend. He said this week: “We’ve made it very clear that the medium-term future of growth in our economy needs to be private sector led.”

Opposition Treasury spokesman Angus Taylor doesn’t believe this. The Opposition has a potent message: judge Labor by what it does, not what it says. Taylor says Australia is on the “wrong track” under Labor, defined by “higher taxes, reckless spending and big government” combining to keep inflation high.

The Coalition will have a rich target field for its election assault on the government, but the question remains: where is the Coalition’s economic policy?

Judo Bank chief economic adviser Warren Hogan says from its inception the Albanese government has misread the economy and the inflation threat. Labor, terrified about even a shallow recession, pursued the anti-inflation campaign with caution and kid gloves. What happened? The battle has been protracted, drawn out across seven quarters of shrinking per capita growth with devastating political consequences for the Albanese government. If Albanese loses the election – still most unlikely – the reason will be mismanagement of inflation.

Warren Hogan says Labor has paid the price because of its paranoia about avoiding even a mild recession. Picture: NewsWire / John Appleyard

Hogan tells Inquirer: “The government didn’t understand that the economy has changed and we now live in a labour-scarce world. It is a world where there is more inflation in the system, yet the government failed to address this with its paranoia about avoiding even a mild recession. The result is that Labor has paid the biggest political price because it dragged out the efforts to contain inflation. They weren’t serious about devising a fiscal agenda and having monetary and fiscal policy working together to beat inflation.”

Hogan says the latest numbers constitute “the good, the bad and the ugly”. The good is signs of recovery in household income and spending due to strong employment, solid wages and tax cuts. “It looks like a consumption recovery is under way,” he says. This leads to the bad: “Government consumption is too strong and the government is actively competing with the private sector for resources. If these governments don’t change their spending patterns and if the private sector picks up, we are going to face a further real problem with inflation.”

A retrospective analysis is useful. Albanese won in 2022 because the public saw cost of living as the major issue (even then) and was ready to trust Labor to tackle it. But Labor didn’t grasp the economic and political dangers in the inflation surge. It got entangled in mixed objectives – beating inflation, maintaining low unemployment and running its government-directed reform agendas.

The ugly is the productivity failure: “Productivity is kaput,” Hogan says. “Down in the quarter and over the year. Zero improvement in six years which means living standards are going nowhere.”

Richardson says: “The long-term answer to higher living standards doesn’t lie in either tax cuts or subsidies – it lies in productivity, where there was another dismal result. At some stage Australian politicians need to lead rather than merely pandering to the punters. We need to focus on the longer term, not only the short term. But that’s an idle wish ahead of an election where both sides are promising nothing changes.”

While Murphy recognises Labor’s National Competition Policy initiative and its $900m productivity incentives fund, she identifies the still overarching challenges: falling productivity growth, falling terms of trade off the back of declining commodity prices, consumer prices still too high and ongoing high interest rates. She says: “The private sector needs more from their governments than short-term fixes to today’s problems. A focused agenda that drives GDP growth from the private sector is crucial – now more than ever.”

Chalmers had a stack of ideas but was weak on practical strategy. Picture: NewsWire / Nikki Short

From the start, Chalmers’ vision was ambitious, in effect seeking a remaking of Australian capitalism He declared the Abbott-Turnbull-Morrison era to be the “wasted decade” and pledged a values-based reformist capitalism for the 2020s. He said that in fighting inflation Australia could not “just batten down the hatches” – it must aim higher with Chalmers saying “we can build something better, more meaningful and more inclusive”.

As the new Treasurer, Chalmers said Labor would retreat to neither the failed neoliberalism of the defeated Coalition era nor “retrace the steps of our heroes” – thereby rejecting any duplication of the Hawke-Keating agenda. It was time for a new beginning.

So what was the answer? Chalmers had a stack of ideas but was weak on practical strategy. He finished the essay in a burst of ebullience, saying “2023 will be the year we build a better capitalism, uniquely Australian – more confident and forward-thinking, more aligned with our values; based more on evidence and integrity”.

But the “better capitalism” is yet to materialise. Labor suffers not just from weak economic results that threaten its political future but doubts about whether it can find a viable economic growth strategy for the 2020s.

Albanese and Chalmers face two intersecting tasks – surviving the election and showing the economic model on which they have bet their futures actually works. The jury is out.

Economist Steven Hamilton, commenting on Chalmers’ essay at the time, said it contained “no clear proposition, no coherent framework for thinking about the world, no tangible plan for action”.

Yet Chalmers has followed through on many of the ideas he outlined – pursuing dividends in the transition to clean energy, backing more secure and well-paid jobs, creating new industries, empowering workers, supporting the care economy, championing gender equality, redesigning markets, renovating the institutions from the Reserve Bank to the Productivity Commission, co-investment plans in industry, housing and energy, and given the budgetary problems, recruiting super funds and business as “active participants in shaping a better society”.

Steven Hamilton was critical of Chalmers’ essay. Picture: Facebook

It is time to ask: was this too many ideas lacking a singular economic strategy for a more competitive and productive Australia?

The upshot has been a country that costs more to run, that is burdened with more bureaucracy and state intervention, that staggers from an unreformed tax system, a less flexible IR system, pursues a highly dubious industry policy and is pledged to subsidies and ideological regulation in managing a faltering energy transition.

Responding to the national accounts, Chalmers rejected the startling assessment offered by Murphy, admitted the economy is “very weak”, but said inflation was falling, the tax cuts were beneficial and that there was growth in real incomes. He said the government was pledged to “attract and incentivise” private sector investment.

Chalmers signalled there would be more cost-of-living relief before the election.

At the same time, Albanese intends to enshrine a policy of universal childcare as an election centrepiece – despite its substantial cost, its marginal impact on female workforce participation and the inequality inherent in the model as assessed by the Productivity Commission. This looks like a doubling down on Labor’s existing policy direction – more of the same.

This week’s economic figures suggest that at the election, because Labor cannot argue that living standards have risen, Albanese and Chalmers will resort to the proposition that things would be worse under the Coalition. It reveals the weakness of their position – but it still may do the trick.