Australian Economy

Skilful economic measures are needed to fight the inflation stalking Australia’s households | Danielle Wood, Steven Hamilton, Jessica Mizrahi

Australians are in for a bumpy short-term ride

Labor claims it has inherited an economic “mess”. This is partly political convenient, but also partly true.

Healthy economic growth and an unemployment rate “with a ‘3’ in front” are clearly good news, but they belie very real cost-of-living challenges with inflation outpacing wages growth by a considerable margin.

Governments can’t do much to relieve short-term cost of living pressures. But they should at least avoid making the problem worse by adding stimulus to a constrained economy. Unfortunately, the former government locked in measures that will do just that – most notably a supercharged tax offset that will hit bank accounts in coming months. While difficult to wind back, Labor should commit to not adding more fuel to the fire in its October budget.

Measures that reduce the costs to households of government-supported goods and services can also make a difference. Policies already announced to reduce out-of-pocket costs for childcare and medicine should help at least some households.

In the medium term, the government can improve living standards by boosting productivity and dismantling barriers to workforce participation.

Promised reforms to boost women’s workforce participation by making childcare more affordable and accessible are crucial and need to be well executed.

The new government must work with the states to create a in integrated national energy and climate policy, including well-planned investment in the grid to support growing renewable energy penetration. This is the only way to implement the energy transition while keeping power prices low – crucial for Australia to thrive in the coming green industrial revolution.

Finally, the education and skills agenda should be paramount – a country’s human capital is essential for its long-term success. For too long, education and skills have been beset by poor policy and implementation.

Australians are in for a bumpy short-term ride but if the new government can settle and focus on these critical fronts, the economic future should be brighter.

Danielle Wood is CEO of the Grattan Institute

There are no easy fixes

I can’t recall a less favourable time to take government. Paradoxically, the economy’s strength is a major source of its current woes. Coupled with supply chain disruptions, recent natural disasters and Russia’s invasion of Ukraine, inflation has been pushed to a 27-year high (excluding the GST), with electricity prices recently doubling and gas prices tripling.

The temporary fuel excise cut appears to have been wiped out (though petrol prices would be even higher without it) and interest rates will rise rapidly as concerns build that inflation expectations may become “unanchored” – embedded in higher wages, then higher inflation, and so on. Somewhat eerily, it portends a repeat of the 1973 oil crisis, which produced “stagflation” through the 1970s: low growth with high inflation.

The challenge for the new government is there are no easy fixes. A big hike in minimum and award wages or the provision of cost-of-living relief, as in the budget, simply increase demand, further accelerating inflation. The argument some people use against first-homebuyers’ grants – that subsidising demand with fixed supply will simply push up prices – that same argument applies here.

Meanwhile, the new government inherits a dire set of public finances. It’s not so much the trillion dollars of debt – the welcome price we paid in both the global financial crisis and pandemic to preserve our economic capacity. Rather, it’s the structural deficit that will only widen given more realistic growth in spending and productivity, and higher interest rates.

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Fortuitously, the tasks of taming inflation and repairing the budget are aligned. The spending audit should be front-end loaded as much as possible – cancelling current spending programs which offer poor value for money and also drive up inflation. The government’s focus on expanding supply is also critical and should be intensified.

In the longer term, the focus should turn to raising productivity through reforms to education and skills, higher migration, and improvements to the tax and industrial relations systems – all of which can and should be geared towards greater fairness and sustainability. Establishing a coherent climate policy framework would go some way to doing so, for example.

Steven Hamilton is assistant professor of economics at George Washington University and visiting fellow at the Tax and Transfer Policy Institute at the ANU

We face challenges that we haven’t seen since the 70s

Australia continues to stand on economically solid ground. We’ve been supported by strong institutions, decisive policy and good fundamentals. These have helped us weather the pandemic and the GFC. The result has been decades of steady-as-she-goes economics. Now we face challenges that we haven’t seen since the 70s.

  • High(er) inflation: Headline inflation is now over 5% for the first time since 2001, and hasn’t yet showed signs of slowing.

  • Tight labour markets: At 3.9%, unemployment is officially at its lowest rate since we began calculating the rate monthly. A greater proportion of people are working than ever before; yet there are still over 310,000 unfilled jobs.

  • Geopolitical uncertainty: Global supply chains are still struggling to catch up after Covid-19 disruptions. Russia’s invasion of Ukraine has contributed to soaring energy prices, while tensions with China are continuing to hurt Australian exports.

This is all just the tip. Under the surface, gnarly long-term issues make up the body of an iceberg that remains unaddressed.

  • Climate: Climate inaction locally and globally risks damage to our families, homes and economies. Central banks (including the RBA) estimate that climate inaction could wipe out a quarter of GDP by 2100.

  • Productivity: Economic growth over the last five years has been buoyed up by participation and commodity prices. Both are at record highs. Productivity growth, on the other hand, has remained stubbornly below 2% since 2014-15. Without progress on productivity, we risk increasing reliance on volatile export prices.

These challenges aren’t easily resolved. There are, however, some widely endorsed policies worth bringing to the table.

  • Transitioning to a green economy will create new industries and new jobs – and avoid costs down the track.

  • Increasing focus and funding for primary healthcare will help make a healthier nation and create less strain on hospitals in the long run.

  • Investing in our teachers and training will allow Australians of all ages to build knowledge and proficiency, particularly in areas of high demand.

  • Moving towards land tax and away from stamp duty would create efficiency gains. It also reduces the costs of buying, meaning a more flexible market.

Jessica Mizrahi is an economic consultant and commentator. She has taught, researched and applied economics for over a decade

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