Australian Economy

Treasurer Jim Chalmers sells good news on inflation and tax cuts

Many economists are already bringing forward their predictions for the timing of rate cuts. Even the troublesome “sticky” services inflation that has so worried the Reserve Bank is behaving somewhat better, with a 4.6 per cent annual reading for the quarter compared with 5.8 per cent in the September quarter.

The Reserve Bank meeting next week will no doubt still express its caution about the continuing risks but the broader narrative of improvement will help propel the government into 2024 and in particular into the Dunkley by-election on March 2.

Lingering black spots

Labor believes its revised formula for the stage three tax cuts – relying on spruiking larger tax cuts for 84 per cent of taxpayers (87 per cent in Dunkley) – will drown out Coalition attacks on its broken promises.

“The reason the tax cuts are so important is because people still need relief from these cost-of-living pressures,” the treasurer said as he welcomed the inflation numbers. “We do face the period ahead from a position of genuine economic strength. If you think about 2024, what we are seeing here is inflation slowing, real wages growing and from the first of July, we will see tax cuts flowing.”

That inflation optimism is despite some obvious black spots, especially housing costs including rent, insurance, hospital costs and some food products – despite falls in meat and fruit and vegetables prices over the three months.

Facing their own political pressures, the big supermarkets will certainly be as keen to point out this key reduction as Labor is to boast its market interventions have helped keep rent, electricity and childcare prices lower than they would have been.

Add in at least the possibility that two years of soaring energy bills for households have finally ended, with prices anticipated to even fall a little from mid-year given the big reduction in wholesale prices.

Chalmers is still clearly sensitive to the charge that Labor has chosen to deliver quick cash to households rather than showing any interest in long term structural reform.

“We’ve been able to combine relief and reform,” he insisted. “Relief for middle Australia and better reform for our economy.”

There’s a catch

That reform claim is disputed by the business community and others pushing for far more comprehensive change to improve a rickety, complex tax system overly dependent on income tax and bracket creep. Individual taxpayers now account for more than 50 per cent of Commonwealth tax revenue.

But Chalmers has so far shown little interest in pursuing substantive structural tax changes and trade-offs. This predilection will be boosted by the encouraging inflation figures and ever accelerating demands on the budget.

The latest review of the Australian economy from the International Monetary Fund calling for major spending cuts and comprehensive tax reform to address dismal labour productivity – as well as rate increases to curb Australia’s inflation more quickly – will be politely ignored. All good, thanks.

Instead, Labor MPs will feel happier to start 2024 selling their voters the promise of a brighter year and more government assistance for disgruntled households.

Yet success in combating inflation always comes with a catch.

Innes Willox, chief executive of the Australian Industry Group, said the fall in the December quarter was good news but came with a warning.

“The warning arising from today’s announcement is that the economy may be slowing too rapidly, and we may be looking at a hard rather than a soft landing,” he said. “The November increase in interest rates is yet to fully flow through and further dampening impacts may tip the economy into reverse.

“Recent business surveys and a sharp drop in retail sales in December underline the possibility of a hard landing.”

He argues that the key to avoiding a hard landing is for the pace of wage increases to moderate given the lack of productivity improvements. That’s hardly Labor’s preferred theme.

But it does reflect the increasing level of concern in the business community about the cracks in the economy, compounded by the weak retail spending figures.

According to Deloitte Access Economics, the rest of the path to fighting inflation is unlikely to be smooth.

“Tensions in the Middle East, Australia’s housing crisis and a disorderly energy transition all threaten to cause fits and spurts of inflation over the next 12 months,” it said.

“Overwhelmingly, however, 2024 will see the focus of economists and policymakers shift from lowering the rate of inflation to lifting the pace of economic growth.”

That seems certain to be an even tougher and prolonged fight.

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