ALP’s economy spin: but for Jim Chalmers, it would be grim

Jim Chalmers has credited government spending for keeping Australia out of recession amid the weakest economic growth since 1991, which he says undermines RBA forecasts and calls for further rate hikes.

Treasurer Jim Chalmers in Canberra on Wednesday.

Jim Chalmers has credited record government spending and Labor’s budget strategy for keeping Australia out of recession amid the weakest non-pandemic economic growth since 1991, using the data to reject the Reserve Bank’s claim the economy is “running too hot”.

As the risk of recession increases and household borrowers struggle to pay bills in a high-interest rates and inflationary environment, the economy grew by a paltry 0.2 per cent in the June quarter, bringing annual growth to just 1 per cent.

The Treasurer, who banked the minuscule growth as a win despite the country being gripped by a per-capita recession, said his budget strategy was vindicated because the country would likely be in ­recession if not for government spending.

Following the Australian ­Bureau of Statistics releasing ­national accounts data on ­Wednesday, economists warned of further delays in rate cuts due to a clash between fiscal and monetary policy and said using government spending to save the economy was akin to “moving the deck chairs around”.

While money markets predict a near 70 per cent chance the RBA will reduce the cash rate from 4.35 to 4.1 per cent at its December meeting, economists believe the central bank will not cut rates prematurely because its preferred underlying inflation marker was still too high at 3.8 per cent.

Most economists believe the RBA’s next move on rates won’t happen until its February meeting at the earliest.

Gross domestic product per capita fell for the sixth consecutive quarter, slipping by 0.4 per cent. GDP per hour worked, a proxy for labour productivity, slumped another 0.8 per cent in June, erasing any productivity gains in the past five years.

Driving the lion’s share of economic growth was an increase in recurrent government spending, up 4.7 per cent last financial year, owing to increased outlays for public sector wages and health services, including Medicare and the National Disability Insurance Scheme.

Dr Chalmers said record ­government spending was partly due to a hangover of programs rolled out during the Covid ­pandemic, arguing that stripping away these measures showed spending growth was lower under Labor than the former Coalition government.

But with public sector spending as a share of the GDP hitting a ­record high of 27.6 per cent, ­economists said the outlays were hampering the RBA’s efforts to lower inflation to its 2-to-3 per cent target band.

Dr Chalmers – accused of pressuring the independent central bank to deliver a rate cut after warning that its hikes were “smashing the economy” – said dire economic indicators including the lowest household savings ratio in 17 years and a dramatic fall in private consumption showed families were under extreme pressure. Since peaking at 24.1 per cent in June 2020, the household saving-to-income ratio has fallen to 0.6 per cent, ABS data shows.

After RBA governor Michele Bullock last month effectively ruled out rate cuts this year, given further easing of stubborn prices remained uncertain, Dr Chalmers said national accounts figures highlighted a softer economy than the central bank had predicted.

While the RBA had forecast quarterly household consumption to grow by 1.1 per cent in the year to June, ABS data showed it was just 0.5 per cent.

“I don’t sort of quibble with the Reserve Bank’s forecast or try and second guess their public commentary,” Dr Chalmers said. “I think it’s clear from the numbers that consumption came in a bit softer than they were expecting.

“We’re making sure that as we fight inflation we do that in a way that doesn’t smash people or weaken an economy which is already very soft and subdued. We know people are doing it tough.”

Dr Chalmers, who will release Treasury’s updated growth forecasts in the December mid-year budget update, on Wednesday confirmed that he would deliver a fourth budget before the election next year.

KPMG chief economist Brendan Rynne said: “In many regards, the public sector has its foot on the accelerator and the Reserve Bank’s foot is on the brake – it’s stalling the economy.”

Dr Rynne said “in effect, we’re in no-man’s land” and the public spending surge was “coming at a cost” to private sector activity.

“While there’s this idea that government spending has saved the economy, what it’s effectively done is just move the deck chairs around,” he said.

With federal and state government budget spending propping up the economy, EY chief economist Cherelle Murphy said the RBA would hold rates higher for longer. “The lack of co-ordination between fiscal and monetary policy means the path to low and stable inflation – and therefore lower interest rates – is slower than it needs to be,” Ms Murphy said.

As business leaders warned that the slide in productivity would make the RBA’s task of returning inflation to its target “more difficult”, opposition Treasury spokesman Angus Taylor said: “This looks, feels, and smells like a recession”.

Mr Taylor said the economy was being propped up by immigration and government spending, putting Australia on the path to “ruin, not recovery”.

“This is the sixth consecutive quarter now of a household recession, the sixth consecutive quarter of negative GDP per capita,” he said. “That’s 18-months our economy has been in a household recession. Growth has fallen ­consistently since Labor came to government. You cannot bring ­inflation down and grow the ­economy, when productivity is collapsing and the private sector (is) in retreat.”

Ahead of parliament returning next week, Dr Chalmers will pit his budget strategy against the Coalition’s push for greater budget austerity. The government claims much of its spending was unavoidable. “We resisted the kind of free advice that … we should slash and burn in the budget and deliver some kind of scorched earth austerity,” the Treasurer said. “That would have been absolutely disastrous for the economy, we now know that’s the case. We struck exactly the right balance in our budget and these numbers do vindicate the balanced approach we took.”

Betashares chief economist David Bassanese said the figures were unlikely to spur the RBA to press ahead with rate cuts. “Assuming the economy does not fall into a hole, but only continues to crawl forward slowly, the RBA will likely remain on hold – waiting for further evidence that the weakened state of the economy is doing the job of bringing down inflation,” he said.

Business Council of Australia chief executive Bran Black said Australia was “missing out on investment and economic growth because of increased red tape regulation, an inefficient tax system and uncertainty around project approvals”.

“I constantly hear from CEOs that Australia is missing out on major investments because of our planning and regulation systems and the many duplicative taxes,” Mr Black said. “Our economy is stumbling and now is the wrong time for the government’s planned cap of international students, which will damage the economy.”

Global recession fears have been directly linked with the success of China’s economic growth plan and other major international shocks.