Australia’s economy needs Jim Chalmers to take the high road to budget repair
In the war on inflation, the Reserve Bank is fighting alone. Labor must pull its weight.
Those afflictions are making it harder to confront the inflation crisis, meaning interest rates are higher, for longer, than they need to be. The onus is on the Albanese government to at least not make it harder for the Reserve Bank to rid the economy of a corrosive foe, without the misery of a recession.
“It’s our job to use the levers we’ve got to get on top of the inflation challenge in our economy,” Jim Chalmers wrote in our pages last week. “There are three key parts to tackling inflation – helping people who are hurt most by it, addressing the supply pressures that help cause it and delivering a responsible budget to avoid adding it – and our plan hits all these targets.”
Or in modern messaging, Labor is pursuing the three Rs: relief, repair and restraint. The Treasurer maintains his taxing and spending are not the problem; that his master plan is backed by top officials, their curated policy settings in harmony.
“It’s the right strategy in an economy where inflation is expected to have peaked, but will be higher than we’d like for longer than we’d like,” he said on Thursday after the jobless rate edged up to 3.7 per cent last month.
Treasury secretary Steven Kennedy and Reserve Bank governor Philip Lowe made separate appearances before a Senate committee on Wednesday; the latter also fronted the House of Representatives on Friday.
Our top two economic bureaucrats are seasoned pros, able to play out two-hour sessions without getting clean bowled or hit on the helmet. The task is to be accountable to parliament, not infuriate the occupying regime, while dropping subtle truths about the state of play.
The emerging picture is of a country making huge transitions – ageing, clean energy, geostrategic, trade, digital – without a settled model to deliver the high-performance economy, financial sustainability and open markets that will provide the best chance to maintain our exceptional living standards. Of course, the world is a lot less friendly to us and our allies, which makes it harder for a country that primarily gets richer off exports. Readers here will appreciate the “polycrisis”, the malign actors and the real-time shuffling of economic and military might.
Both Kennedy and Lowe thought the budget was in “neutral”, in a technical sense. Given the underlying cash balance (a deficit of around 2 per cent of gross domestic product) is expected to persist, the econocrats warned this needs to be fixed.
Private and academic economists argue an economy at full employment should produce a budget in rude surplus, operating in “contractionary mode”, taking the edge off price pressures. The energy-price relief for households will make the RBA’s job harder, says budget expert Chris Richardson. Those subsidies will be spent on other things.
Labor’s off-budget funds for manufacturing, clean energy, infrastructure and housing have caught the attention of Coalition senators and global agencies but inflation is not the clear and present danger with these vehicles. Cronyism, crowding out, and cost blowouts are just the initial red flags here.
What would help the RBA’s inflation fight are supply-side reforms, which aid flexibility and promote economic dynamism, as well as measures that stop price gouging, such as tougher merger laws and active market watchdogs. Lowe has called out price mark-ups and the tardiness of businesses in passing back to shoppers some of the easing in goods prices evident overseas.
Kennedy also highlighted the primary economic challenges, including “driving long-term improvements in productivity and consolidating the fiscal position”. That prescription hasn’t changed materially in a decade.
Chalmers has received the blockbuster five-year review by the Productivity Commission. The Treasurer said he’d work his way through the nine volumes, almost 1000 pages, and more than 70 recommendations after a year-long deep dive into the nation’s underperformance.
To get any traction for reform Chalmers will need to consult with his colleagues and power up a discussion about the malaise in productivity and what must be done to improve it.
But there was also an off note, almost straight off the bat. “Now, obviously, the government won’t pick up and run with every single recommendation from the Productivity Commission, but I think there will be areas of common ground,” Chalmers said. “I think there will be opportunities to align our economic plan with some of the directions put forward by the PC.”
Why would Chalmers undercut the work before the debate fires up? Could it be the ultra-cautious ex-staffer’s approach he seemed to have thrown off? A nod to the ACTU, with its throwback views on deregulation and its bloodlust to rid Canberra of neoliberalism?
The PC will get a makeover as well, as the Treasurer said in his recent foray into progressive ideation. It should not be beyond Labor to better use the intellectual horsepower and rigour at its disposal that usually offers practical solutions to our big issues in a politically adept way.
Still, the ground is shifting and we’ll soon learn how much policy territory the Treasurer will cede to Labor’s left flank, which mistrusts markets and whose demands will soon morph into a never-ending, Greens-like call on the public purse.
The budget is just over 11 weeks away, with a whole lot of new spending coming on to the books for defence kit, new social programs in health and ageing, and cost-of-living relief, plus the existing runaway costs for debt interest and the National Disability Insurance Scheme.
The fiscal challenges will persist; socking away revenue surprises are bonuses, not a long-term strategy. The econocrats note the community wants a bigger social compact, but the parliament has to find a way to pay for it.
“The projected structural deficit throughout the medium term makes the need for fiscal consolidation clear,” Kennedy told senators, many of whom are itching to ditch the legislated stage three tax cuts for different reasons.
Some in Labor’s caucus, certainly all the Greens (pure one day, impotent the next), would argue for spending an equivalent to those cuts (due from July 2024) now, rather than reducing the overall tax burden. The Treasury chief emphasised how average personal tax rates would rise under the onslaught of fiscal drag, as wage inflation means a higher proportion of pay is taxed at higher rates.
But Canberra, regardless of who made it bigger, needs a trim. At the very least, taxpayers should get more for their money. Mega programs, such as the NDIS, are going to have to be reined in, as are the generous tax breaks to a narrow band of beneficiaries.
We’ll soon see who gets the lion’s share of that largesse, although Labor will need to be more clever about how it slims down so-called “tax expenditures”.
“We’ve said inflation is the biggest threat to the economy and that means we need to be careful that where we are committing public funds that it has an economic dividend,” Chalmers said on Thursday.
“Not every dollar that you spend in the budget is inflationary.”
No, but right now, we’re still borrowing from the future, and there are opportunity costs. Chalmers was deft and cautious in his first fiscal outing. In the world coming at us, the stakes are so much higher.
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There may be rumblings about a new political rhythm in Anthony Albanese’s Canberra, but don’t be fooled about any meaningful progress on big-picture policy. Australia’s ills are chronic: erratic growth, slack productivity, and a flabby budget set to permanent deficits.