Australian Economy

Labor Treasurer Jim Chalmers’ big challenge

There is, of course, theatre to this. But there’s reality, too. Chalmers doesn’t want to be tagged for things that aren’t his fault. That’s fair enough – he wants to be judged on his merits, not the circumstances.

But voters don’t owe it to politicians to be fair to them. We should, however, be fair to ourselves. And doing so requires judging a government on its contribution, not the vicissitudes of the economic cycle or foreign upheavals.

What Chalmers has inherited

In the end, the public and the treasurer want roughly the same thing. But making that judgment requires separating those things over which the government has control, and things beyond its control – or which it inherited.

So, what’s a reasonable reading of what Labor inherited?

On the fiscal side, Chalmers was handed net debt of about 33 per cent of GDP. That’s low by international standards, but high compared with recent Australian history, having grown by about 15 per cent in response to the global financial crisis and another 15 per cent during the pandemic.

More concerning is the roughly $40 billion a year structural budget deficit, which adds 2 per cent a year to net debt. And that deficit starts out higher, while being highly dependent on commodity prices.

Can the biggest intergenerational issue – housing affordability – be remedied, instead of being made worse through demand-side subsidies?

Chalmers is faced with a low unemployment rate of 3.5 per cent, which is good news. However, not unrelated to that, is high inflation of 5.1 per cent at last reading, but realistically probably a 7 per cent run rate. Part of this is due to the previous government’s fiscal largesse (including in the recent budget), and international factors are also partly responsible.

He also inherited two major entitlement programs that are growing rapidly.

Spending on the already large National Disability Insurance Scheme is forecast to grow at more than 10 per cent a year.

After 30 years of compulsory superannuation – which, whatever the original intention, ought to be largely a replacement for, rather than a supplement to, the age pension – we have four in five retirees receiving a pension or part pension. This will cost $62 billion by 2025-26 – about 10 per cent of budget spending.

This is the baseline against which we should grade Labor’s economic performance.

Suppose 30 months from now we’ve had net debt tick up by $130 billion, the Reserve Bank has tightened interest rates to between 3 per cent and 3.5 per cent to get inflation back under control, the immediate skills shortage has been alleviated, and unemployment is closer to the natural, but still low, rate of 4.25 per cent.

This would be what a safe pair of hands might deliver. Or, to borrow a phrase from Scott Morrison, what “people who know how to manage money” might achieve.

How about serious reforms?

There would be no shame in that, and a good deal of credit – and gratitude – would be due. But what would count as a superior performance?

There really aren’t a lot of big-ticket budget items to be cut. Sure, cutting back spending on regional and community grants makes sense – no more “oinky” car parks and suchlike – but that’s in the hundreds of millions. It’s a good, symbolic, rounding error.

Maybe trying to tax multinationals more is possible – but the constraint here is Janet Yellen’s brilliant, but limiting, global 15 per cent minimum tax deal. I wouldn’t count on much extra revenue.

And on the spending side, Labor’s childcare policy will help if the eventual design involves increasing supply, otherwise it will just drive up prices and do nothing to boost female labour supply, access or equity. Other important measures, such as those relating to energy and education, all have pay-offs in the medium to long term.

So, in fact, superior economic management necessarily involves serious reforms.

Can the $30 billion-plus a year we give in superannuation tax concessions actually reduce dependence on the age pension? Can our tax mix become less reliant on income taxes, such as through a “progressive GST”? Can the biggest intergenerational issue of all – housing affordability – be remedied, instead of being made worse through more demand-side subsidies?

Labor didn’t really campaign on any of these issues. And given the state of our politics, who can blame it?

But if Chalmers wants to be more than a safe pair of hands, then he will, at some point, have to decide that he has a mandate to tackle the hard issues that have been ducked for decades.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button
SUBSCRIBE TO OUR NEWSLETTER

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.