In these deeply uncertain times of economic crisis, there is only one certainty: Treasurer Jim Chalmers will not take responsibility for the problems at hand. As long as he is under his supervision.
This week’s new inflation figures show that while inflation is falling in the rest of the world, it is rising in Australia. Opposition leader Peter Dutton raised this point in parliament this week, listing developed countries around the world with lower inflation rates than our own.
Rising inflation in Australia gives the Reserve Bank (RBA) reason to consider raising interest rates at its next meeting in August, possibly also the following month.
A growing list of economists is beginning to argue that the interest rate cuts discussed before the next election could now be replaced by a series of increases.
It is difficult to imagine the Prime Minister being happy with the performance of his Treasurer.
It is hard to imagine Prime Minister Anthony Albanese being satisfied with the performance of his Treasurer, given the current direction of the economy.
Labor MPs were told Chalmers had the economic answers between now and the next election.
At the center of all this was a budget that would walk a fine line between austerity and overspending, leading to a drop in inflation and interest rates just in time for an election campaign.
Labour could campaign on its surplus message and win a second term thanks to sound economic management, the theory goes.
Chalmers no doubt saw it as his ticket to the Labour leadership a day later. Now he should be fighting simply to retain his current role. After all, it is given at the discretion of the prime minister.
Instead of inflation coming down, it is rising again, perhaps soon followed by interest rates.
The idea of holding early elections later this year must now surely be pushed to the back burner, if not off the agenda altogether.
The risk of a rate hike during a campaign is one Anthony Albanese will not want to take.
It is a difficult situation for those responsible for the government’s economic decisions.
To make matters worse, today the Productivity Commission confirmed that national productivity has not improved one bit over the past 12 months, having worsened over the previous 12 months.
And it’s no wonder, as Industrial Relations Minister Tony Burke continues to pour sand into the wheels of the industrial relations system, making it difficult for employers to recruit staff.
Therefore, the wage increases that the government likes to boast about are occurring without any improvement in productivity.
People are paid more, but businesses get nothing in return beyond higher costs, leading to higher rice prices for consumers.
The wage increases continually pushed by the union movement and the government also have an inflationary impact, along with the spending contained in the budget.
When the July tax cuts take effect, they will also add fuel to the inflationary fire.
If rates rise, as is now speculated, anyone with a home loan will see their tax cuts eaten up before their very eyes.
And because of the way Labor restructured the tax cuts – breaking an election promise in the process – 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 worthy of admiration, even though most economists have criticized the way he put it together.
Its plot exists in an alternate universe devoid of reality.
When the RBA governor held her latest press conference, she essentially said that if rates rose further it would be a sign that the RBA had given up on the possibility of a soft economic landing.
In other words, a rate hike later this year will be a signal that the RBA has reached the point where it feels even risking a recession is a necessary evil to get inflation back under control.
What does this say about the government’s decision to risk rising inflation with its policies? It means that the recession will be its burden and its responsibility.
Considering Australia is already in recession per capita and has been for five consecutive quarters. It was saved from a technical recession thanks to very high immigration figures that have only fueled the real estate crisis.
The only reason more rate hikes are expected at the risk of triggering a recession is because the government has been boosting the economy when it shouldn’t have been.
I have written before about the fact that there is no easy way out of an inflationary cycle. Pain is a necessary ingredient to achieve this. People won’t like it, but it’s better than the alternative of prolonged, high inflation.
The government simply hoped it would not have to accept painful measures to reduce inflation. Hoping instead that inflation would continue to fall naturally, even as it spent on targeted spending and tax cuts that have had the opposite effect.
Economists across the country are now thinking, “I told you so,” as they watch the Treasurer try to convince himself that he is not responsible for what is happening.
Economists across the country are now thinking “I told you so” as they watch the Treasurer try to evade responsibility for what is happening in the real world.
I could have done better
So what might Treasurer Jim Chalmers have done differently if he had shown political courage and economic understanding of the situation Australia found itself in?
He should have ensured that the surplus was larger. A larger surplus would have eased government spending and reduced its inflationary impact on the economy. Chalmers was prepared to settle for any surplus for its political value rather than turn it into a significant one that would also have had economic value.
All of those housing and energy rebates should never have been awarded, despite technical attempts to hide their impact. Instead of eliminating the increased spending we saw during the pandemic, it has been allowed to be included in the budget.
Even the legislated Stage Three tax cuts could have been delayed. Doing so would have prevented them from having an impact on the RBA’s next set of rate decisions. It would also have allowed Labor to recalibrate them only after securing another election victory and thus avoid breaking its promise.
And instead of prompting the Fair Work Commission to raise wages above the rate of inflation, he should have asked them to suppress wages for long enough to bring inflation back below three per cent, where it would help bring rates down rather than continuing to risk pushing them up.
I understand that it is politically difficult to make such decisions. They would certainly have been unpopular, especially among the rank and file of the Labour Party.
But that’s what leadership is all about. Be prepared to make difficult decisions for the benefit of the country, even if they result in losing political skin along the way.
That did not happen, and as a result, things will continue to get worse before they get better.
