Jim Chalmers needs to be right about the economy and inflation if Labor wants to remain in office

Federal Treasurer Jim Chalmers. Picture: NCA NewsWire / Max Mason-Hubers

Jim Chalmers will roll the dice next week on a bet that he is right about inflation and the economy and the economists are wrong.

The budget, and Labor’s political fortunes, may live or die on this great gamble. Surely Chalmers must know this.

In the end, he may well be right; that the economy is weaker than expected, the inflation threat has lessened and spending is justified and won’t be a problem. Yet the consequences of any failure on this measure will be profound.

There are now dramatically competing assessments about the state of the economy and inflation, which reveal the political balancing act underwriting Chalmers’ PR mission ahead of the budget.

While he talks down the strength of the economy, economists warn that it is not yet soft enough. There are plenty who have been happy to publicly disagree with him, on the basis that there is a big difference between a weak economy and one not growing because it is operating at capacity.

The economists’ argument is there is plenty of evidence that the economy is not weaker, at least not in areas important in the inflation context.

The Reserve Bank appears to be concerned enough about this as well. Its language has shifted towards the likelihood that inflation will remain high for longer than it thought just a month ago, ergo no rate cuts likely until after the election.

To justify Labor’s spending profile, Chalmers needs people to buy the argument that the economy is in a dangerously weakened state. The weaker the economy is believed to be, the more acceptable will be the reason to spend money.

Since Chalmers’s recalibration of a weaker than expected economy, the OECD and the IMF have inconveniently revised up their previously gloomy outlooks.

This has now led to a not unreasonable conclusion that Chalmers was trying to retrofit the conditions to suit the growth story that his Prime Minister unveiled in the Future Made in Australia program.

Chalmers this week has circled back to the inflation problem, and has been at pains to point out that it remained the government’s priority.

The Treasurer insists that the budget would be deflationary in the first year of the four-year forward estimates with a growth focus – aka spending – in the latter years. Confused? You’ve a right to be.

One insider said this amounted to a “gaslighting” of the Australian public on the economic narrative.

The risk for Chalmers is that if he is wrong about all this, and the central bank is forced to lift rates later this year, then he is guaranteeing that the Albanese government will get the blame for it.