After 100 days, inflation and wages still the defining challenges
The day after the May 21 election, Jim Chalmers sat down in his Brisbane home with Treasury secretary Steven Kennedy.
The secretary gave an unvarnished view of the state of the domestic and global economy plus the condition of the federal budget.
Treasury secretary Dr Steven Kennedy with Treasurer Jim Chalmers days after the May election.Credit:AAP
Chalmers on that afternoon said the “combination of inflation and wages growth is really the defining challenge that we are inheriting”.
One hundred days later, inflation and wages growth remain the challenges of the Albanese government.
Inflation and wages had been front and centre of Anthony Albanese’s election campaign. On May 10, when pressed on whether he would back an increase in the minimum wage in line with inflation, he was unequivocal.
“Absolutely” was his one-word answer during a press conference.
Two days later, he used a one-dollar coin to illustrate the size of the hourly increase in the minimum wage backed by Labor. That increase was delivered by the Fair Work Commission, which approved a 5.2 per cent jump in the minimum wage a month after Albanese’s coin analogy.
The government’s ongoing problem is that wages growth is simply being overwhelmed by prices.
Wages growth, as measured by the wage price index, has picked up to its highest pace in eight years at 2.6 per cent. But the surge in inflation means wages are suffering their largest fall on record in real terms.
Inflation was forecast in the March budget to climb 4.25 per cent in 2021-22 before stepping down.
Already at 6.1 per cent, inflation is now tipped by the Reserve Bank to nudge 8 per cent by Christmas. The RBA is forecasting inflation to still be at 3.5 per cent in mid-2024.
While the focus has been on petrol prices, inflation is across the entire economy. From pets to olive oil, prices are easily out-pacing wages growth.
To tame inflation, the RBA is in the middle of the most aggressive increase in interest rates since 1994 with no one in the bank or Treasury assured about how this will affect the economy, property prices or the jobs market.
On Sunday, Chalmers said the government had spent its first 100 days focused on issues that mattered most to all Australians.
“We’ve been working around the clock on our economic challenges, trying to bring people together around wages and skills and productivity,” he said.
Many of those issues will be on display at this week’s jobs and skills summit but behind the scenes, the focus is growing on the October 25 budget for the 2022-23 financial year.
This is an unusual budget as a 2022-23 budget was handed down in March. So much has changed on the economic front – the United States may be in recession and inflation could be on its way to 18 per cent in Britain – that Josh Frydenberg’s last fiscal blueprint is now lining bird cages around the country.
Chalmers will use his budget to honour most of the promises made by Labor during the election.
It will pick up, where possible, some ideas from this week’s summit. If an agreement is struck between unions and businesses on an increase in the skilled migration intake, that will be included in the budget.
Finance Minister Katy Gallagher has overseen Labor’s audit of government spending. The first cuts will be in the October budget.Credit:Alex Ellinghausen
Finance Minister Katy Gallagher, overseeing a review of all government spending, is expected to reveal early cuts to programs made by the Coalition while it was in office.
The budget will also contain a mark-down in long-term productivity assumptions.
Productivity has been growing slower than what has been assumed in past budgets for several years. The change in assumption will affect the long-term projections about the economy, such as its expected size.
It’s not just interest rates on mortgages that have gone up. The cost of government borrowing has surged.
In February, $1 billion of federal debt to be repaid by November 2031 was sold at an interest rate of 1.93 per cent. In the week before the March budget, another $1 billion that won’t be repaid until November 2031 was sold at an interest rate of 2.75 per cent.
By early August, $800 million of the same 2031 debt was sold with an interest rate of 3.18 per cent.
That increase in interest has a real impact on the budget. The February debt will cost taxpayers $19.3 million a year in interest costs. The August debt, though it’s lower than what was sold in February, will cost the budget $25.4 million a year.
Chalmers has started a formal review of the Reserve Bank, the first time the bank – which pumped hundreds of billions of dollars into the economy through its quantitative easing program and took interest rates to a record low of 0.1 per cent – has faced such an interrogation in 40 years.
The inquiry will canvass the bank’s inflation target, the way monetary and fiscal policy interact, the make-up of the board, the RBA’s governance system and culture.
The bank was already under fire for its handing of interest rates before COVID-19. It has since come under attack for saying rates could remain at 0.1 per cent until 2024 before it started tightening monetary policy in the election campaign.
There are plenty of analysts who fear the bank could inadvertently drive the country into recession.
This week’s summit has drawn parallels with Bob Hawke and Paul Keating’s summit, held within 100 days of their election victory of 1983. The economic policy framework for Labor’s next 13 years in power were nailed into place at that meeting in Old Parliament House.
Chalmers, Gallagher and the rest of Labor’s economics team hope their first 100 days deliver half of what was begun during the Hawke period.
Jim Chalmers with former treasurer and prime minister Paul Keating. In his first 100 days, Keating helped establish a decade of economic reform.Credit:Jeremy Piper
But a government’s fortunes can also be undone in its first 100 days.
Labor’s Jim Scullin took office on October 22, 1929 when the country was already in recession. The timing could not have been worse. Two days later, in what historians would describe as Black Thursday, Wall Street suffered the largest one-day sell-off of shares in history, heralding the start of the Great Depression.
Scullin’s government splintered (Labor treasurer Joe Lyons went on to be the United Australia Party prime minister) and suffered a catastrophic defeat at the 1932 election.
A new government can also inflict deep wounds on itself early in office. Tony Abbott and his treasurer Joe Hockey announced their Commission of Audit six weeks after their 2013 victory.
The audit’s politically poisonous findings were released just ahead of the 2014 budget. Within 18 months of that budget, Abbott and Hockey were gone.
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