PVO: Australia has a choice. We can either have a year or two of pain… or a decade of ‘why is everything so expensive?’ But with rates set to rise, Jim Chalmers is spending MORE taxpayer money than during Covid
Today the Reserve Bank meets, and Australians should brace for the reality that the inflation story isn’t over.
Plenty of economists think a rate rise is back on the table after the latest numbers directly contradicted Treasurer Jim Chalmers’ premature claims that he’d slayed the inflation dragon.
The RBA may hold rates. But even if that happens it’s likely to be a temporary reprieve for mortgage-holders, unless Labor starts to take seriously the task of cutting the size of government.
As long as inflation remains too high, the risk of rising interest rates remains on the agenda, and so does the squeeze that quickly follows on to mortgages, rents, business costs and household budgets.
Here is the part of the conversation politicians rarely level with voters about: Like it or not, getting inflation properly under control requires a year or two of pain.
Not theatrical pain, but real restraint: slower spending, consumers learning to do without, and a labour market that cools enough to stop price rises becoming habitual.
The alternative is far worse. If inflation lingers, it becomes a slow tax that never passes Parliament but hits every pay packet and every bill. It turns basic household budgeting into guesswork.
The alternative is a short and deliberate spell of discomfort – which beats a long, grinding decade of ‘why is everything still getting more expensive?’
Australia has a choice when it comes to economic policy, writes Political Editor Peter van Onselen. It could suffer through a year or two of pain… or a decade of ‘why is everything so expensive?’ Above a shopper emerges from Woolworths
There are no good options once inflation is out of control. The lesser of evils is to aim to fix it, in the short term.
The latest Bureau of Statistics CPI data shows prices rose 3.8 per cent in December, up from 3.4 per cent the month before that.
Both results are above the RBA’s 2-3 per cent inflation target. When inflation sits above the target band, the central bank has one job: to keep monetary policy restrictive enough to bring inflation back down.
Its way of doing that is to lift interest rates. Which is why it’s the government’s fault when the RBA’s hand is forced, because fiscal constraint (spending less) helps stop inflation from rising, which stops the RBA from lifting rates.
That is the deal. Which is why the spotlight should shift from the Reserve Bank in Martin Place to the Federal government in Canberra.
Monetary policy is a blunt instrument. It works by making money more expensive and slowing the whole economy down.
It’s risky because it can cause a recession, which should be another reason governments should stop forcing the RBA’s hand via massive spending.
Did you know government spending is now higher than it was during the pandemic?
Jim Chalmers will blame inflation for that too, but the pandemic wasn’t all that long ago, and the amount of government dollars going out the door was obscene by normal standards.
Despite the Federal government propping up the economy during Covid with programs such as JobKeeper, Jim Chalmers is now spending even more in normal times
In normal times fiscal policy is meant to be disciplined, targeted and conscious of the inflation environment. On that score, Chalmers and Labor have been missing in action for years now.
They have talked endlessly about cost of living relief and responsible budgeting, but they have avoided the hard part of running a national economy: taking demand out of the system when inflation is already too high.
The Commonwealth’s latest Budget numbers show how big the state has become. Government payments are forecast at 26.2 per cent of GDP in 2024/25, going up to 27 per cent in 2025/26.
And worse, still, the parliamentary budget office expects government debt to keep climbing as a share of the economy after that, which is what happens when high spending becomes structurally embedded.
That is not a government running lean during an inflation fight. It is the state adding petrol to the inflation fire.
Governments love handouts because they look like help. They buy votes. But in an economy where supply is constrained – think housing, construction capacity, energy costs, skilled labour and services – pumping up demand isn’t relief, it is more fuel going on the fire.
Chalmers keeps celebrating inflation being down … Then he gets bitten by reality
As mentioned, Chalmers made the strategic mistake of talking up his victory over inflation too early. Last year he publicly celebrated it being back in the target band, crowing that it was his doing. Albo said much the same thing.
That may have been politically timely and enjoyable for Labor, but it was economically complacent and plain wrong. Anyone who has watched an inflation cycle knows the last mile is always the hardest. You don’t declare inflation ‘under control’ because it’s briefly back within the target range, just. Especially when temporary measures like the energy rebate can flatter the headline number.
Federal and state governments need to spend less, not because it is ideologically virtuous but because it reduces pressure on interest rates and on household budgets.
That means fewer broad-based cash splashes dressed up as compassion. It means saying no more often to new spending programs. It also means being far more careful about public sector pay outcomes and government funded wage deals that flow through contributing the the cycle of rising inflation.
When the state is a giant employer, big pay rises don’t just sit neatly on a line item. They have a ripple effect. They set benchmarks for other sectors. It all fuels inflation, wiping out the value of the pay rise. It’s a vicious cycle, which is why the only way out of it is some short term pain that really will put the inflation genie back in the bottle.
If inflation stays high, the RBA won’t have the luxury of patience, whether that lost patience starts tomorrow or next month. And higher interest rates cause their own problems. Even a small rise flows straight into variable rate mortgages and refinancing costs, and it tightens credit conditions for businesses.
Higher rates also hit renters, because landlords pass the cost of higher mortgages on.
Inflation is painful enough, inflation plus rising interest rates is the sort of double hit that wrecks confidence.
The Reserve Bank could decide to raise the cash rate during its meeting today – which would have consequences for mortgage-holders and renters whose landlords pass on the costs
Labor can keep playing the short term game, buying applause with spending, hoping the RBA do the dirty work of lifting rates and fixing the inflation problem while the government avoids the blame. The clown show that is the Coalition at the moment makes obfuscating blame even easier for Albo and his team.
Or the government can do what it should have done ahead of time and treat inflation as the central threat, and control what it can control.
That means real spending restraint, not rhetorical claims that fall short of what’s necessary.
It means accepting that a year or two of deliberate discomfort is the price of avoiding many more years of quiet, grinding pain.
Equally, if the opposition wants to be taken seriously any time soon it will resolve its internal differences and put economic management front and centre when developing its alternative government manifesto. Take the risk of announcing what is needed to fix inflation: an agenda that cuts the size of government back to what it used to be when inflation was lower and economic growth was higher. That, of course, will also require a serious economic reform agenda. Not something we’ve seen in this country for nearly a quarter of a century.
If Chalmers wants to be a serious economic manager, he needs to stop acting like inflation will solve itself, and start behaving like the government can do something about it. Because it absolutely can – if the courage to act is there.
