Perils of a growth mindset: Jim Chalmers versus economists on inflation impact

Jim Chalmers says investors and economists have ‘overreacted’ to last week’s hot inflation figures, putting Labor further out of step with expert economic consensus on spending cuts.

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

Jim Chalmers says investors and economists have “overreacted” to last week’s hot inflation figures, putting Labor further out of step with expert economic consensus that the government should limit spending in the May budget to put downward pressure on prices growth.

As leading economists called for the government to do more to help the RBA by reining in spending, the Treasurer called for “perspective” on the nation’s recent progress on inflation, saying the response to last week’s consumer price report was “a pretty big ­over-reaction”.

Financial markets are now pricing in a 40 per cent chance of what would be a politically damaging interest rate hike by Nov­ember, but Dr Chalmers said “there’s no shortage of opinions at this time, but everything that you read in the paper is not necessarily right”.

“Often it’s wrong, this sort of commentary you get at budget time. And I thought there was a pretty big over-reaction, frankly, to the inflation number last week,” he said.

“Inflation has almost halved since we came to office. It moderated substantially in the quarter. In annual terms we’re still ahead of the (mid-year budget update) forecast for inflation so we need a bit of perspective here.”

The Treasurer’s comments came as the Australian Bureau of Statistics revealed employee households’ living costs rose by 6.5 per cent in the year to March, compared with the headline rate for CPI of 3.6 per cent. Traders have dramatically reassessed the outlook for rates following the March quarter consumer price figures, which showed an unexpectedly sharp acceleration in price pressures in the three months.

Despite the Treasurer’s ­attempts to downplay recent economic developments, NAB head of market economics Tapas Strickland said the moves by the market were “pretty rational”.

Mr Strickland said the ­unemployment rate of 3.8 per cent was lower than the RBA had ­expected, even as inflation was running ­hotter. “In terms of the budget message, it should still be primarily on the inflation fight,­ ­because we know it takes a co-ordinated effort, so any help (from tighter fiscal ­settings) would help lessen the pain on certain segments of society,” he said.

Judo Bank economic adviser Warren Hogan agreed that last week’s consumer price report was “a big deal”. “If we want to get through this inflation outbreak without a ­recession, then we need an ­extended period of below-trend growth, and we are starting to see signs the economy is starting to ­recover,” Mr Hogan said.

With its third budget, Labor was “trying to lay out their grand economic plan ahead of the next election”, but this was looking ­increasingly out of place with ­developments in the economy over recent months, he said.

“The situation at the start of the year suited a big-investment, big-spending policy narrative. In the last six weeks the whole ­momentum in the economic data has shifted, and we are seeing that overseas and here.”

Mr Hogan said there was a reasonable chance the RBA would be forced to raise the cash rate from its current 4.35 per cent, towards the 5-5.5 per cent level reached in comparable economies, including the US and Canada.

“The case for a hike isn’t there now, but there it could be by ­August,” he said.

KPMG chief economist ­Brendan Rynne said the government had mistakenly ­believed the Reserve Bank would be able to bring inflation under control without help from fiscal settings.

“My impression is that they thought monetary policy was going to do enough heavy lifting for them, so that they could maintain a relatively loose fiscal stance to meet their political agenda,” Dr Rynne said.

“The reality is that the ­additional spending they have undertaken has continued to stoke aggregate demand, not helped by the strong population growth.”

Dr Rynne said the evidence was that government spending accounted for a massive 55 per cent of the growth in the economy between 2022 and 2023. He said this extra spending was at all ­levels of government, and across operational and capital ­expenditure. “What that tells me is that there has been a universal loosening of the purse strings.”

Opposition Treasury spokesman Angus Taylor, in a speech to the Queensland Business Chamber on Thursday, will accuse the Albanese government of becoming complacent about cost-of-living pressures.

Mr Taylor’s speech will lay markers for a Coalition policy agenda built around fiscal ­restraint, and warn of an ­entrenched GDP per capita ­recession and an inflation crisis that was now being ignored by the Albanese government.

“Labor is complacent about the seriousness of our inflation challenge at a time persistent price pressures are eroding Australians quality of life,” Mr Taylor says in extracts of the speech provided to The Australian.

“The Treasurer said that ­economists had given a ‘big over-­reaction’ to the latest inflation ­figures. This demonstrates a ­Treasurer too relaxed about price pressures that are eroding ­Australians’ quality of life.” Mr Taylor also accuses the government of ignoring warnings about its spending plans.

“The Prime Minister’s dismissal of his policy critics as “flat earthers” and the Treasurer’s reflection on the intellects of the economists who question their strategy, show a government that is unwilling to listen about the risks their agenda is creating,” he says. “Increasingly, this is a ­government out of touch and with a tin ear to the consequences of their policies. We need a better way. In these uncertain economic times, we need a budget focused on a back-to-basics economic agenda.”

Dr Chalmers said Deloitte’s prediction for a $13.4bn surplus in 2023-24 – or a $14.5bn improvement from Treasury’s forecast in December – “dramatically overstates the revenue upgrade in the budget”, as he again refused to admit to a surplus that is universally expected to be delivered on May 14.

“We won’t be getting anything like the sorts of revenue boost that they (Deloitte) are guessing at in those reports today, and as a consequence of that if we can get to a surplus in this year, it won’t be as big as what they are suggesting,” he said.

The mid-year budget update predicted a deficit of $1.1bn for this financial year would blow out to an $18.8bn deficit in the next, followed by deficits of $35.1bn and $19.5bn in 2025-26 and 2026-27, respectively.

Deloitte Access Economics lead partner Pradeep Philip said the test for all new spending – including the mooted billions associated with the Future Made in Australia policy – had to be not only that it was effective, but that it was affordable in the longer term, and that this was only possible via a structural improvement in the budget.

“That’s the budget test: ­whether over the forwards and ­beyond good spending decisions are affordable,” Dr Philip said.

“No one disputes that investing to lift growth, and development to help transitions, and spending on social policies are ­important, which is why making structural improvements to the budget is so crucial.

“If you start asking whether if you are spending a dollar here, are you saving a dollar somewhere else, it will force us to think about the performance of the ­public sector.”

Financial markets are now pricing in a nearly 40 per cent chance of a rate hike by the ­November RBA board meeting, and are not factoring in a full rate cut until November 2025.