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

In these deeply uncertain economic times of crisis there is only one certainty: Treasurer Jim Chalmers won’t take responsibility for the problems afoot. On his watch. 

This week’s new inflation numbers show that while the rest of the world is bringing inflation down, it is now rising in Australia. Opposition Leader Peter Dutton made this point in parliament this week, rattling off the list of developed nations around the world with lower inflation rates than our own. 

Australia’s rising inflation gives cause for the Reserve Bank (RBA) to consider lifting interest rates when it next meets in August, possibly again the following month too. 

A growing list of economists are starting to contend that mooted interest rate cuts ahead of the next election could now be replaced with a series of increases instead. 

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

Labor MPs were told that Chalmers had the economic answers between now and the next election.

At the centre of it was a budget that would walk a fine line between austerity and spending too much, leading to falling inflation and falling interest rates just in time for an election campaign.

Labor would be able to campaign on its surplus message and win a second term in office off the back of strong economic management – so the theory goes. 

Chalmers no doubt saw it as his ticket to the Labor leadership one day down the track. Now he should be struggling to simply retain his current role. It is bestowed at the discretion of the PM after all.  

Instead of inflation coming down, it is again on the rise, perhaps with interest rates soon to follow. 

The idea of an early election later this year must surely be on the back burner now, if not off the agenda entirely. 

The risk of a rate rise during a campaign is a chance Anthony Albanese won’t want to take. 

It is a tough predicament for the government’s economic decisionmakers

Making matters even worse, today the Productivity Commission confirmed that national productivity hasn’t improved one little bit over the past 12 months, having worsened over the 12 months prior to that. 

And it is no wonder, as the Workplace Relations Minister Tony Burke continues to pour sand in the gears of the industrial relations system, making it harder for employers to hire staff. 

Wage rises the government likes to crow about are therefore happening without any improvements to productivity. 

People are being paid more but businesses aren’t getting anything for it beyond higher costs which leads to higher rices passed on to consumers. 

Wage rises continually being pushed by the union movement and the government therefore also have an inflationary impact, in conjunction with the spending contained in the budget. 

When the July tax cuts hit they, too, will add fuel to the inflationary fire. 

If rates do rise, as is now being speculated, anyone with a home loan will see their tax cuts eaten away 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 they were before. 

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

His argument exists in an alternative universe devoid of reality. 

When the RBA Governor held her most recent media conference she essentially said that if rates go up 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 rise later this year will be a sign that the RBA got to the point where it felt even risking a recession was a necessary evil to get inflation back under control.

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

Bearing in mind that Australia is already in a per-capita recession and has been for five consecutive quarters. Saved from a technical recession by sky high immigration numbers which have only fueled the housing crisis. 

The only reason more rate rises at the risk of triggering a recession is even on the cards is because the government has been pump priming the economy when it shouldn’t have been. 

I have written before about that fact that there is no easy way to get out of an inflationary cycle. Pain is a necessary ingredient for doing so. People won’t like it but it is better than the alternative of prolonged high inflation. 

The government simply hoped not to have to sign up for pain to bring down inflation. Hoping instead that inflation would naturally continue to fall, even as it spent up on targeted spending and tax cuts which have had the opposite effect. 

Economists up and down the country are now thinking ‘I told you so’ as they watch the Treasurer try and talk himself out of responsibility for what is transpiring.

Economists up and down the country are now thinking ‘I told you so’ as they watch the Treasurer try and talk himself out of responsibility for what is transpiring in the real world 

Could’ve done better 

So what could Treasurer Jim Chalmers have done differently had he shown political courage and economic understanding about the situation Australia was in? 

He should have ensured the surplus was bigger. A larger surplus would have taken the heat out of government spending, lowering its inflationary impact on the economy. Chalmers was happy to settle for any surplus for its political value rather than make it a meaningful one which would have had economic value too. 

All those housing and energy rebates should never have been handed out, notwithstanding the technical attempts to hide their impact. Rather than stripping away the upsurge in spending we saw during the pandemic it has been allowed to bake into the budget. 

Even the legislated Stage Three tax cuts could have been delayed. Doing so would have prevented them having an impact on the next set of RBA decisions on rates. It also would have allowed the Labor Party to recalibrate them only after securing another election win and therefore avoid their broken promise. 

And rather than egg the Fair Work Commission on to lift wages beyond the inflation rate, it should have requested they suppress wages for long enough to drag inflation back to below three percent where it would help bring rates down rather than continue to risk pushing them north. 

I get that it is politically hard to make these sort of decisions. Unpopular one and all they would have been, no doubt. Especially with Labor’s base. 

But that is what leadership is all about. Being prepared to make difficult decisions in the country’s best interests even if they result in a loss of political skin along the way. 

That didn’t happen and as a result things are going to continue to get worse before they get better.