‘Confronting’ wages pain will get worse before it gets better: Jim Chalmers

Jim Chalmers has warned wages will fail to keep pace with inflation for longer than forecast as he prepares to deliver a ‘confronting’ economic update.

Treasurer Jim Chalmers, in Canberra on Monday, says the world economy is ‘in a difficult, if not dangerous, place right now’. Picture: AAP

Jim Chalmers has warned wages will fail to keep pace with inflation for longer than forecast as he prepares to deliver a “confronting’’ economic update next week ahead of an October budget where savings will need to be found to pay for reinstated pandemic leave payments.

The Treasurer warned next week’s economic statement to parliament would have a higher inflation forecast in the wake of Reserve Bank forecasts of 7 per cent. “It’ll be confronting in terms of real wages,’’ Dr Chalmers said of the update. “There is no credible economic forecaster in Australia right now who thinks that wages growth is going to keep up with inflation.

“We will be revising up our expectations for inflation. And so that will make the real wages situation worse before it gets better. I would certainly say that rising interest rates … will have an impact on growth in the economy.”

Following a meeting of G20 finance ministers and central bank governors last week, Dr Chalmers said the world economy was in a “difficult, if not dangerous, place right now” with high inflation, rising interest rates, slow growth and food and energy insecurity.

But he guaranteed Australian families and businesses would be better off from his October budget, citing the government’s $5bn investment in childcare as a measure that would reduce living costs.

Dr Chalmers again attempted to manage expectations by telling Australians rising interest rates would punch a $13bn hole through the budget, and that they should anticipate the six-month reduction in fuel excise would end as planned in September.

“My expectation, and the expectation I’d encourage people to have, is that we can’t afford to continue that petrol price relief forever,” he said.

The Coalition’s pre-election economic and fiscal outlook, delivered in April, predicted wage growth would increase from 2.75 per cent through the year to the June quarter to 3.25 per cent through the year to the June quarters of 2023 and 2024.

The March federal budget forecast inflation – which is at 5.1 per cent – to “moderate from 4.25 per cent in 2021-22 to 3 per cent in 2022-23 and 2.75 per cent in 2023-24”.

But Reserve Bank governor Philip Lowe said last month that he expected inflation would peak at 7 per cent in the December quarter, then “take some time” to ease back towards the 2-3 per cent target range.

Dr Chalmers conceded he would need to identify further savings after the commonwealth and states agreed to a 50-50 funding split to continue $750 pandemic leave payments until the end of September, worth nearly $800m.

“One of the expected outcomes of our audit into rorts and waste in the budget is to see where we can trim spending, which has been allocated for political reasons, not economic reasons by our predecessors,” he said. “From time to time, you will ask me whether that will be a key task of the first budget. And I say no, it will be the key task of every budget – to make sure that we are getting maximum bang for buck from taxpayer dollars, which are costing more and more to service because every dollar, every additional dollar in the budget is a borrowed dollar and that now costs us more to pay back because of rising interest rates.”

Australian Industry Group chief executive Innes Willox said Dr Chalmers was “right to ring the bell” about the economic risks facing Australia. “Inflation and interest rates are on the up; petrol prices are already high and fuel excise relief is in place only for a couple of more months; gas and electricity prices are set to rise steeply over coming months; and all of these are putting pressure on household budgets,” Mr Willox said. While welcoming Labor’s focus on the higher costs of new government debt, Mr Willox said “excessive or misdirected cuts to spending and programs was a risk”.

Australian Chamber of Commerce and Industry chief executive Andrew McKellar said unsustainable wages growth risked embedding higher inflation. The Australian revealed on Monday that the Australian Manufacturing Workers Union was threatening to pursue wage increases of eight per cent in response to rising inflation while union leaders warned of more strikes in support of pay claims.

ACTU secretary Sally McManus said after years of record low wage growth, workers were now dealing with deep real wage cuts caused by big businesses choosing to pay out profits and pass on cost increases rather than lifting wages and keeping prices down for consumers.

“The bargaining system is failing to provide the kind of wage growth we need for a strong economy and shared prosperity,” she said.