There is no sugar-coating the economic challenges facing Australia – in the short term and the long term.
This in turn poses a political conundrum for Labor and its ambitions for government beyond this term. It must find solutions to both problems.
Things are going to get worse before getting better – yet there is no guarantee about what better looks like. The key message is that there is no return to the past.
The Intergenerational Report, to be released Thursday, paints a grim picture for the budget’s revenue base over the long term and the rapidly expanding spending profile courtesy of an ageing population. It signals an impending age of softer growth, for the coming decades.
Productivity declines will also naturally lead to a lowering of living standards for Australians who are already facing the worst cost-of-living crisis in decades.
Labor’s policy approach is critical not just to its own prospects, but to whether Australia succeeds or fails. It involves politically charged issues from migration policy to tax reform.
But Chalmers is not a bold reformer in the traditional sense. He sees reform in increments. Small changes over a longer period rather than fundamental shocks to the system.
His is a more cautious approach. Tweaking as the conditions and the opportunities arise.
Chalmers wants to signal electorally that new thinking needs to be applied but without any surprises when it comes to tax in this term of government.
But the Albanese government faces significant challenges across multiple fronts. While cost of living is the most acute politically, there are other challenges ahead, including meeting commitments to its own signature policies, with energy policy key among them.
While Chalmers this week will focus on the long-run issues set out in the IGR, there are more immediate problems that will bring the politics into sharper focus over coming weeks and months.
China is the central issue driving both the strategic and economic outlook for Australia
The forecast for growth over the next two years is likely to be downgraded further. Interest rates are having an impact, as is the slowdown in consumption and deflation from China. The risks to the Australian economy are significant. The chances of a negative quarter of growth have risen sharply. Recession is not out of the question.
Having benefited from the commodity boom, bracket creep and full employment to post a $20bn surplus this year, Chalmers plays down the prospect of a second surplus.
This is becoming more remote with the outlook for commodities softening, and the China outlook, but also the sharp rise in spending pressures in the short term – namely the NDIS and interest payments on debt.
Albanese will be conscious that the political advantage of this initial achievement could be lost to the political cycle as Labor seeks re-election with the economy in a potentially significantly weakened position and the budget back in deficit.
This is the fine line Chalmers is now balancing, politically and economically. He sees the government’s immediate priorities as the inflation problem and budget repair. Longer-term, however, under Chalmers, the government will seek broader reform.
The political question is where there is divergence between Labor’s values-based agenda and real economic need.
For Chalmers, the key focus will be on the transformation of energy markets, the human capital and migration problem, a need to broaden and deepen the nation’s industrial base, a rethink of capital flows and putting Labor’s stamp on the nation’s economic institutions.
Announcements on competition policy to drive future productivity growth and a shift in the external focus with a Southeast Asian strategy to diversify markets will soon follow.
All have enduring consequences in reshaping our economic profile over time, but are unlikely to excite the electorate. This is critical to understanding Chalmers’ approach. Safety in reform.
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