Jim Chalmers warns of difficult time for the economy after latest GDP figures

Jim Chalmers says the tax windfalls that delivered the first surplus in 15 years are over, warning of a difficult time ahead.

The tax windfalls that delivered the first surplus in 15 years are over, according to Jim Chalmers, who warns of a “difficult time” for the economy after growth slowed to just 0.2 per cent in the final three months of last year.

Interest rate hikes and cost-of-living pressures crushed consumption through 2023, with the latesy national accounts figures revealing annual growth in real gross domestic product sagged to 1.5 per cent in the year to December – the weakest since 2000, outside the Covid pandemic.

The Treasurer flagged that the worst might not be over for workers and the economy, even as he emphasised the nation’s relative resilience.

“Even slow growth is significant growth given everything that’s coming at us from around the world and all the impact of these rate rises,” Dr Chalmers said on Wednesday.

“This is a difficult time for our economy. It remains to be seen when we see faster growth in our economy. We’d like to see it ­before long.”

While there remained “a good chance” that the Albanese government would be in a position to reveal a second consecutive budget surplus in May, Dr Chalmers said balancing the budget would become increasingly difficult as the post-Covid jobs boom ended and unemployment climbed.

Taming still intense price pressures remained the government’s “primary focus”, but “these (GDP) numbers show that the balance of risks in our economy are shifting from inflation to growth,” he said.

“We also expect that a slowing economy will have implications for revenue, meaning smaller ­revenue upgrades than we have become accustomed to in the budgets that we’ve handed down so far,” Dr Chalmers said. “Those first two budgets were carefully calibrated to the economic conditions. And that will be the guiding principle behind the third budget that (Finance Minister) Katy (Gallagher) and I hand down in May as well.”

KPMG chief economist ­Brendan Rynne said the ­economy was already too reliant on government largesse, and the case for the Reserve Bank holding interest rates at these levels was “quickly evaporating”. “Government spending held up this ­quarter’s figures but ­remains too high, with the tax-to-GDP ratio becoming entrenched at nearly 27 per cent, rather than the 22-23 per cent pre-Covid levels,” Dr Rynne said.

“So any suggestion of fiscal stimulus to kickstart the economy is the wrong policy solution.”

The quarterly result was a notch lower than in September, and the national accounts revealed a steady deceleration in growth through 2023 – but no ­collapse, as real consumption lifted by a meagre 0.1 per cent over the three months and the year.

Analysts continue to expect RBA rate cuts only later this year, potentially as early as August.

While the national economy grows, however limply, real GDP on a per-person basis dropped by 0.3 per cent, a third straight ­quarterly decline, to be 1 per cent lower through the year, the Australian Bureau of Statistics figures showed.

Per-capita GDP has not grown since late 2022, underlining the ­intense pressures facing individual households, which have been masked by blockbuster net migration through last year.

Australians spent on what they had to, and saved what they could, helped along by a big lift in government welfare support and public sector wages that delivered a kick to incomes in the quarter.

ABS head of national accounts Katherine Keenan said: “Households upped their spending on essential items like electricity, rent, food and health. Meanwhile they wound back spending in discretionary areas, including hotels, cafes and restaurants, cigarettes and tobacco, new vehicle purchases and clothing and footwear.”

With households still under the pump, the economy was propped up by more government spending, the ABS said, alongside a solid lift in businesses investment in new warehouses and data centres.

Australians’ savings ratio increased for the first time in two years (3.2 per cent in December versus 1.9 per cent September), as employee compensation lifted by 1.4 per cent and government social assistance payments jumped by 5.9 per cent.

On the other side, mortgage ­interest payments rose by a further 5 per cent to be nearly 40 per cent higher for the year as borrowers continued to roll off cheap fixed-rate loans, the ABS said.

CBA head of Australian economics Gareth Aird said “the weakness in consumer spending lay at the heart” of the economy’s troubles. After accounting for population growth, real consumer spending per capita plunged by 2.4 per cent over the year. “Such an outcome would normally be associated with a large negative shock or recession,” Mr Aird said. “The weakness in the consumer lies at the heart of the soft GDP outcomes. And it is the primary reason why the unemployment rate is on a firm upward trend – albeit from an incredibly low level.”

There was a surprise drop in ­income tax payable in the three months to December, which the ABS said was explained by an unusually large amount of tax paid in the previous quarter. Still, there was plenty of evidence that workers were handing over an increasing share of their wages to the tax office via bracket creep: the 8.1 per cent increase in compensation of employees was outpaced by an 11.5 per cent jump in taxes paid.

Alongside government spending and business investment, net exports contributed 0.6 percentage points to the quarterly GDP growth figure. That was due to a strong lift in coal and iron ore exports, but also a sharp decline in imports as shoppers pulled back on spending and firms ran down stock levels.