Australian Economy

Jim Chalmers banks on capital spending to help ease cost-of-living crisis | Australian economy

The new treasurer, Jim Chalmers, is banking on a surge in capital spending to boost productivity in the economy and ease a “cost-of-living crisis”.

After the Australian Energy Regulator on Thursday lifted standard power prices by as much as 20% for some customers, Chalmers said the increase revealed “a very serious situation” and was just one of several challenges left by the Morrison government.

“Electricity prices are the pointy end of the cost-of-living crisis,” Chalmers said, adding the increase would intensify the “extreme price pressures” in the economy that include sharply higher costs for construction and other sectors.

The treasurer elaborated on comments he made on Wednesday, when he described the Albanese Labor government as inheriting “dire” budget conditions.

“Budget vandalism”, including poor policies that were deeply entrenched, would take time to repair, Chalmers said.

But he had seen enough to rule out extending either the six-month fuel excise cut – that cost $3bn – or the low and middle income tax offset.

“We’re not contemplating changes of that nature,” he said.

Economic data from the Australian Bureau of Statistics (ABS) on Thursday added to evidence that price pressures were building but that the economy remains on a strong growth track.

ABS phone surveys conducted from 11 to 18 May found 38% of businesses planned to lift prices in the next three months, with almost all of them citing rising costs of goods and services, and just over 75% reporting rising energy costs.

Of those not elevating prices, about 50% said they wanted to retain customers while 46% said they were on fixed costs that shielded them.

KPMG’s chief economist, Brendan Rynne, said inflationary concerns were becoming more widespread across business, with higher wages also starting to erode profit margins.

“This is further compounded by the fact for most of 2022 businesses have earned revenues below the levels they had planned to receive, suggesting business profitability for this year is being squeezed tighter than last year and what was expected,” Rynne said.

More positive news for the government was the indication that private investment in new plant and equipment (Capex) for 2022-23 increased 12% from a first estimate to about $130.5bn, according to the ABS.

However, Covid and flood disruptions reduced the actual spending by private firms by 0.3% in the March quarter, compared with the previous three months. Spending on buildings and structures fell 1.7%, while outlays for machinery increased 1.2%.

That overall result was shy of the 1.5% expected by economists, and should trim the March quarter GDP growth figures when they are released next Wednesday.

The higher estimate of planned Capex should improve the efficiency of the economy, aiding Chalmers’ efforts to support growth while easing inflationary forces.

The ABS’s latest private capital expenditure point to a modest though surprising drop in the March quarter of 0.3% for both mining and non-mining sectors. Economists had been expecting a rise of 1.5%. Luckily the outlook is for a big increase.

— Peter Hannam (@p_hannam) May 26, 2022

“The outlook for business investment remains strong but headwinds of capacity constraints and rising costs will hurt, but potentially also elongate the investment cycle,” the CBA said.

Those outlays “will lift the productive capacity of the economy and place downward pressure on inflation over time”, the bank said.

“In the near term more business investment, though, can add to the inflation pulse and there is evidence of rising engineering and construction costs in the system.”

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Chalmers said the government would rely on $20bn in investment in its “Powering Australia” program to strengthen the grid, enable the faster take-up of renewable energy and bring down power prices.

He said he would be relying on an economic team “chock full of talent” that included the finance minister, Katy Gallagher, and Andrew Leigh and Matt Thistlethwaite. Chalmers also intends to consult his close friend and former adviser in the Rudd government, Andrew Charlton, who he said was a “first-rate thinker”.

Chalmers, who earned a doctorate with his thesis on “brawler statesman” Paul Keating, said he talks to the former Labor treasurer and prime minister a couple of times a week. “My friendship to Paul Keating matters a great deal to me,” he said.

Asked how he planned to deal with potentially regular rate rises by the Reserve Bank of Australia in coming months, Chalmers said he intended to be “an explainer in chief”, much like Keating, and try to highlight “where people fit into the story”.

Saul Eslake, an independent economist, said really good treasurers made good decisions, were able to persuade the public it was a good decision, and were “willing and able from time to time to annoy his prime minister by advocating things that are ‘good for the economy’ but which might cost votes”.

“Keating was good at all three,” Eslake said, adding that treasurers since had largely been mixed on the first or second of those measures, but had failed or not tried on third – with the Liberals’ Joe Hockey an exception.

Chalmers said he was progressing through talking to multiple heads of agencies – from the reserve bank to the Foreign Investment Review Board – and business groups such as the Council of Small Business Organisation. As of Thursday morning, he had also spoken to all treasurers of states and territories except Queensland’s Cameron Dick and NSW’s Matt Kean.

Asked whether he planned to remove political appointees from the Morrison government from senior positions, Chalmers said: “If they’re doing a good job, they’re likely to stay.”

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