Jim Chalmers is now being asked to perform a highwire act when he hands down Labor’s first full budget next Tuesday.
He must balance real fiscal discipline against political demands to address the cost of living crisis, which just got worse for several million Australians with a mortgage.
Reserve Bank governor Philip Lowe has proved markets and most analysts wrong by delivering another interest rate rise ahead of the budget.
The opposition will frame it as the RBA firing a warning shot over the government’s bow as a reminder that it isn’t quite yet off the hook on the inflation fighting front.
Lowe has raised lingering concerns about the job market, wages and productivity – the latter two firmly in Canberra’s remit. Chalmers must now be mindful that while the rate cycle is surely at its peak, he can’t do anything that gets in the way.
He has a week to recalibrate if there was a temptation at all to loosen the purse strings to address Labor’s demanding political constituencies. The worst thing the government could do is to assume the peak has passed and start handing out sugar hits.
The trick will be to address cost-of-living concerns without the sort of cash handouts that would encourage people to go out and buy new flat-screen TVs. All indications are that the measures are going to be targeted. Chalmers will hit multiple levers to achieve it. There won’t be big-ticket items.
He has flagged relief for the most vulnerable. But anything broader appears to be off the table. However, he is acutely aware of what is at stake, economically and reputationally. It would be politically terminal for the government to do otherwise than ensure it keeps a lid on spending, banks real savings and does nothing to throw fuel into the inflation fire pit.
The Treasurer has done well to maintain Labor’s economic credentials since it won office.
But this could be destroyed in a heartbeat if the government appears to be having a fight with the central bank.
The prevailing economic and inflationary environment demands that big-spending budgets are a thing of the past, at least for the rest of this parliamentary term.
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