Rate cut dashed if Jim Chlamers follows Queensland Labor spendathon

Economists are warning Jim Chalmers could wreck the government’s chances of a pre-election interest rate cut if he replicates Queensland Labor’s populist cost-of-living spending promises.

Federal Treasurer Jim Chalmers insists there will be no free-for-all spendathon in the lead up to the federal election, expected in May. Picture: Martin Ollman / NewsWire

You can now listen to The Australian's articles. Give us your feedback.

You can now listen to The Australian's articles.

Economists are warning Jim Chalmers could wreck the government’s chances of a pre-­election interest rate cut if he replicates Queensland Labor’s populist cost-of-living spending promises, with the Treasurer vowing to be “responsible” in the lead-up to the poll due in May.

With Labor MPs pushing for the Albanese government to go to the election with more “bold” spending policies to address the ongoing cost-of-living pressures, Dr Chalmers said the federal election was not going to be a “free-for-all of public spending”.

“I want to reassure people and assure people that we will continue to make responsible economic management the defining feature of this Albanese Labor government,” Dr Chalmers said.

“We welcomed the assistance being provided by the former Labor government in Queensland, but we’ve got our own approach to it and that is already rolling out – tax cuts for every taxpayer, energy bill relief for every household, cheaper medicines, cheaper early childhood education, rent assistance, getting wages moving again.

“This is substantial and meaningful cost-of-living help, but it’s also delivered in the most responsible way.”

The debate over government spending comes ahead of quarterly inflation data being released on Wednesday, with economists expecting underlying prices growth to come in at 3.3 to 3.4 per cent in the year to September — above the Reserve Bank’s 2 to 3 per cent target but well down from the 3.9 per cent in the June quarter.

Economists expect headline inflation of between 2.7 to 2.8 per cent, but the RBA is ignoring this figure as it reflects the impact of temporary government subsidies including electricity rebates.

Independent economist Saul Eslake said it would be “bad economics” for the government to replicate Queensland Labor’s policies such as 50c fees for public transport and free school lunches.

“Particularly if it is not targeted,” Mr Eslake said. “If, like the Queensland measures, they go to people who don’t need it as well as people who arguably do, the people who don’t need it will spend it in ways that will add to demand and … to inflationary pressure.

“If the government wants to get an interest rate cut before the next election, assuming that is in May, then they should avoid the temptation to go down that path.”

KPMG chief economist Brendan Rynne said disinflation was beginning to accelerate and populist spending would be counter-productive.

“The best thing that the government can do is sit on its hands and let the market and economy deal with declining inflation and then allowing interest rates to come off,” he said.

“That is going to help more households both directly through mortgage payments and indirectly through taking some of the heat out of rent.”

After Queensland Labor suffered massive swings in regional and outer-suburban seats, Labor MPs publicly played down signs the party’s standing was falling in working class communities.

An emboldened Peter Dutton predicted Mr Albanese, like Mr Miles, would be “punished” by voters at the federal election “because the Prime Minister has promised a lot for Australians and he has delivered nothing”.

“If you treat people with contempt, if you run up huge debt, you mismanage the economy, you create a cost-of-living crisis, you can expect for the electorate to punish you and that is exactly what happened in Queensland,” the Opposition Leader said. “I think that is what is going to happen at the federal level as well.”

Federal Labor’s hopes of winning Flynn, Capricornia or Dawson (all held during the Rudd government years) are practically zero if they lose votes in the three main population centres for those seats – Gladstone, Rockhampton and Mackay respectively – at next year’s election as they did at state level on Saturday.

In 2007, Labor received between 64 and 72 per cent of the two-party-preferred vote in Gladstone, between 62 and 65 per cent in Rockhampton and between 58 and 61 per cent in Mackay.

Labor will also struggle to win back Herbert if the three state Townsville seats – Townsville, Mundingburra and Thuringowa – are repeated at the federal poll.

Despite their disappointing result in Queensland, Greens MPs said Labor needed to adopt more of Adam Bandt’s policies to win the federal election. “Imagine what we could achieve over the next few months if Labor dropped their ‘my way or the highway’ attitude … and come to the table and work with Greens to introduce policies that actually improve people’s lives,” housing spokesman Max Chandler-Mather said.