Pesky ‘events’ delivering a harsh reality to Jim Chalmers

Prime Minister Anthony Albanese and Treasurer Jim Chalmers in Question Time at Parliament House in Canberra. Picture: Getty Images

“Events, dear boy.” This was the famous response of British prime minister Harold Macmillan when asked about the greatest challenges facing political leaders.

It’s a sentence newly installed Treasurer Jim Chalmers might care to recall as he ponders the bleak economic outlook, particularly rising inflation.

He has talked about hitting the ground running, but the reality is his response has been akin to a rabbit caught in the spotlight.

His statement delivered to parliament didn’t really tell us anything we didn’t know.

All that stuff about international factors and the dumb policies of the Coalition – it’s hard to think of many spending programs to which Labor objected, by the way – doesn’t change anything.

The reality is that the assumptions contained in the budget handed down only four months ago now look way out of whack. Treasury expected the CPI to increase by 3 per cent in 2022-23 and to fall to just 2¾ per cent the following year. Real wages were expected to rise this year and the next.

Jim Chalmers’ statement to parliament didn’t really tell us anything we didn’t know. Picture: Getty Images

Treasury has tweaked these figures a bit – particularly inflation. And GDP growth will now be lower and unemployment slightly higher. While the figures on wage growth have been revised slightly upwards, good luck with that one, given Treasury’s woeful forecasting record.

Here’s the thing: during the election campaign, Chalmers had no qualms proposing higher spending than the Coalition and running larger deficits. He was working on the assumptions, now proven as inaccurate, that inflation wouldn’t be a problem and that interest rates would remain very low.

But turning on a dime is always difficult for any Treasurer, particularly a Labor one who has made various commitments that are, politically speaking, difficult to break. Instead of backing away from a whole lot of unaffordable additional spending – think childcare subsidies, cheaper medicines, dubious off-budget funds – Chalmers hasn’t announced any initiatives that might significantly accelerate the repair of the budget.

The point is that the less that fiscal restraint achieves in relieving inflationary pressures, the more the Reserve Bank will have to do in terms of the size and rapidity of raising interest rates.

Chalmers may not have studied economics but he probably has heard that there is no such thing as a free lunch.

As for real wages –a favourite topic for Labor – the reality is that they actually rose for most of the past decade, albeit on the basis of low nominal wage growth but also low inflation. Mind you, productivity growth was also extremely low. It is only now that inflation has galloped away that real wages are taking a pounding. We should expect this to continue for some time.

None of Labor’s you-beaut ideas – from setting up a skills and training commission to subsidising local manufacturing, from spending billions on inefficient transmission lines to handing out more childcare fee relief (and driving up the fees) – will do anything for productivity, even in the medium term.

When it comes to unforeseen events, the mettle of a government is tested by how it reacts.

The early indications are not promising.