Australia

PETER VAN ONSELEN: Crisis? Which economic crisis? A harsh reality check is about to hit the Aussies – and Albo should be furious with Jim Chalmers

In these deeply uncertain economic times of crisis, there is only one certainty: Finance Minister Jim Chalmers will not take responsibility for the problems that arise. Under his watch.

This week’s new inflation figures show that while the rest of the world is bringing inflation down, Australia is now seeing it rise. Opposition Leader Peter Dutton made the point in parliament this week, rattling the list of developed countries around the world with lower inflation rates than ours.

Rising inflation in Australia has prompted the Reserve Bank (RBA) to consider raising interest rates when it meets again in August, and possibly the month after.

A growing list of economists is beginning to argue that proposed rate cuts ahead of the next election could now be replaced by a series of rate hikes.

It is hard to imagine that the Prime Minister is happy with the performance of his Treasurer.

It's hard to imagine Prime Minister Anthony Albanese being satisfied with his treasurer's performance given the current direction of the economy

It is hard to imagine that Prime Minister Anthony Albanese is satisfied with the performance of his finance minister, given the current direction of the economy.

Labor MPs were told Chalmers had the economic answers for the period until the next election.

At its heart was a budget that would walk a fine line between austerity and overspending, leading to falling inflation and falling interest rates, just in time for an election campaign.

Labour could campaign on its surplus message and win a second term with strong economic management, the theory goes.

Chalmers undoubtedly saw it as his ticket to Labor leadership one day. Now he would have to struggle to simply maintain his current role. After all, it is at the discretion of the Prime Minister.

Instead of falling, inflation is rising again, and interest rates may soon follow suit.

The idea of ​​early elections later this year should certainly be put on the back burner now, if not off the agenda altogether.

Anthony Albanese doesn’t want to take the risk of a rate hike during the campaign.

It is a difficult situation for the government's economic decision makers

It is a difficult situation for the government’s economic decision makers

To make matters worse, the Productivity Commission today confirmed that national productivity has not improved one bit over the past 12 months. There had been a deterioration in the previous 12 months.

This is not surprising, as Tony Burke, Minister for Industrial Relations, continues to throw a spanner in the works of the industrial relations system, making it increasingly difficult for employers to hire staff.

Wage increases that the government likes to crow about therefore take place without any improvement in productivity.

People get paid more, but companies get nothing in return, except higher costs. As a result, consumers have to pay more.

Wage increases, under pressure from the trade union movement and the government, therefore also have an inflationary effect, in conjunction with the expenditure included in the budget.

When the tax cuts come into effect in July, they too will add fuel to the inflationary fire.

If interest rates do rise, as is now speculated, everyone with a mortgage will see their tax cuts disappear before their eyes.

And because of the way Labor restructured the tax cuts – breaking an election promise – they are even more inflationary than before.

But none of this is the treasurer’s fault, we are told. Because he continues to claim that his budget was deflationary and should be admired. Even though most economists have been critical of the way he put it together.

His argument takes place in an alternative universe in which reality is absent.

When the RBA Governor held her most recent media conference, she essentially said that if rates rose further it would be a sign that the RBA had given up on the possibility of an economic soft landing.

In other words, a rate hike later this year will be a sign that the RBA has reached the point where it feels that even risking a recession is a necessary evil to get inflation back under control.

What does that say about the government’s decision to take the risk of rising inflation with its policy settings? It means that the recession will be their burden and responsibility to bear.

Keep in mind that Australia is already in a per capita recession and has been for five consecutive quarters. Saved from a technical recession by skyrocketing immigration that has only fueled the housing crisis.

The only reason that further interest rate increases risk triggering a recession is because the government has stimulated the economy when that was not the intention.

I’ve written before about how there is no easy way out of an inflation cycle. Pain is a necessary ingredient to do that. People won’t like it, but it’s better than the alternative of prolonged high inflation.

The government simply hoped not to have to agree to pain to reduce inflation. Instead, they hoped that inflation would continue to fall naturally, even as they spent money on targeted spending and tax cuts that had the opposite effect.

Economists across the country are now thinking, “I told you so,” as they watch the finance minister try to talk himself out of responsibility for what happened.

Economists across the country are now thinking, “I told you so,” as they watch the finance minister try to convince himself not to take responsibility for what happens in the real world.

Economists across the country are now thinking, “I told you so” as they watch the Treasurer try to talk himself out of responsibility for what’s happening in the real world

Could have been better

What could Chancellor of the Exchequer Jim Chalmers have done differently had he shown political courage and economic understanding of the situation Australia found itself in?

He should have ensured that the surplus was greater. A larger surplus would have taken the pressure off government spending, reducing the inflationary impact on the economy. Chalmers was happy to settle for a surplus for its political value, rather than turning it into a meaningful surplus that would also have had economic value.

All those cuts to housing and energy should never have been given, despite the technical attempts to hide their impact. Instead of eliminating the increase in spending that we saw during the pandemic, it is allowed to be budgeted.

Even the statutory tax cuts in the third phase could have been postponed. If they had done so, they could not have had an impact on the next set of RBA decisions on rates. It would also have allowed the Labor Party to recalibrate them only after achieving another election victory and thus avoid their broken promise.

And instead of pushing the Fair Work Commission to lift wages above the inflation rate, it should have asked to suppress wages long enough to bring inflation back below three per cent, where this would help bring rates down rather than risk continuing to push them north.

I understand that it is politically difficult to make these kinds of decisions. Unpopular and everything they would have been, no doubt. Particularly with the Labour base.

But that’s exactly what leadership is all about. Be willing to make difficult decisions in the interest of the country, even if they result in losing political skin.

That has not happened and as a result, things will get worse before they get better.

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