Jim Chalmers’ economic update reveals Labor has little room to maneuver in the face of rising cost-of-living pressures | Peter Hannam
As far as economic statements go, Jim Chalmers’ speech to parliament on Thursday was little more than an update to the Treasury forecast.
We learned that Australian GDP growth would be slower, inflation higher and unemployment rates lower – but only slightly – than expected just before the federal election in May.
The revised forecasts have some significance but carry less weight than the data the Reserve Bank of Australia will rely on for its quarterly monetary policy statement to be released on August 5. Future RBA rate hikes will depend on them.
Chalmers’ figures will also be updated in the off-cycle budget he will present in October. And our unstable era of viruses and violence means that there is little importance to be given to economic estimates for the years to come.
However, while his speech may have lacked surprises, it nonetheless lays the groundwork for what’s to come, both within the budget and beyond. Chalmers seeks to distinguish his approach from the near-decade of coalition rule that preceded it.
Anyone hoping for additional cost-of-living relief would have been disappointed but probably not surprised. Chalmers will likely save all the sweeteners — if any — for his budget, but the government actually has little wiggle room.
Help with childcare, cheaper medical prescriptions, and spending on a modernized power grid to enable faster use of low-cost renewables were his top deals we’ve heard about before.
“They’re very locked into campaign promises,” says John Hawkins, a senior lecturer at the University of Canberra who has served as a senior economist at the Treasury and the RBA. This means that the fuel excise duty cut – which costs $3 billion for just six months – will not be extended, nor will the tax offset for low and middle incomes.
“Even if they try to give people money to offset the cost of living pressures, it’s only going to stimulate the economy more,” Hawkins says. Spending more would amount to “the RBA jumping on the brake and the government jumping on the accelerator”.
Chalmers’ speech, however, was partly intended to massage expectations, especially for workers worried that their wages are not keeping up with inflation – in fact, they are falling behind even further.
For now, the Treasurer forecasts 2023-24 as annual salaries finally rise faster than headline inflation. By most estimates, there’s a lot of slippage to recover from.
We will have an update on wage growth in the June quarter when the Wage Price Index is released by the Australian Bureau of Statistics on August 17. The March quarter WPI was 2.4% and Thursday’s Chalmers update showed 2.75% for the year to June.
“It’s surprising how little acceleration there has been in wages at a time when the unemployment rate has fallen to 3.5%,” says Hawkins.
This may change as employers bid against each other to fill vacancies. Still, the Treasury estimates that the WPI only forecasts an acceleration of 3.75% by June 2023 – a level it will hold roughly firm until June 2026.
Another constraint on the budget – and therefore on Chalmers’ propensity to spend – is rising costs. Australia’s growing trillion-dollar debt bill will overtake the NDIS and another demand. The defense, which Chalmers did not refer to, will also command a growing mountain of money.
However, as EY Australia chief economist Cherelle Murphy notes, there are still “a lot of bright spots in the economy.”
“We have a very active job market and we have the highest labor force participation rate in history,” says Murphy. Households remain “very well protected from the impact of Covid” with some salty $250 billion to draw on.
Interest rates, while on the rise, also remain ‘pretty low’, she says, and there are no signs that the specter of recession is hanging over Australia as it does for many other wealthy countries .
Commodity prices may be skidding – especially for iron ore – but they are still at historically high levels – especially for coal – and that will support state coffers.
Treasury, for example, continues to bank projected iron ore royalties at $55 (AUD$79) one tonne for iron ore, US$130 for coking coal and US$60 for thermal coal.
Compare these numbers with current market rates above US$100 for a ton of iron ore. Both types of coal sell for US$300 or more a ton, largely thanks to sanctions for Russia’s invasion of Ukraine and the ensuing scramble to diversify energy sources.
Murphy notes that coal alone provided Queensland’s recent budget of $5.7 billion which it was not counting on. “That’s a lot of money for a state government as a surprise,” she said.
Still, Chalmers finds himself with a “really difficult balancing act”, with plenty of additional demands to come, especially from the Covid front. There, an additional $750 million must already be set aside with a greater chance of being needed, Murphy says.
And to the extent that Chalmers’ statement was intended to blame the Coalition for economic and budget ills, that job probably isn’t quite done, Hawkins says.
The Morrison government’s last budget relied on annual productivity gains of 1.5% to support its growth and other estimates. However, this rate was only seen during the more reforming era of Hawke-Keating and the early years of Howard and Costello.
“There’s no sign the surge will repeat itself,” Hawkins says. This correction is an adjustment that Chalmers may still have to make if he wants to draw a line under the era of Coalition economic management.