Labor’s pessimistic tone about ‘skyrocketing’ inflation could potentially weaken the economy if it made worried consumers spend less.
In his first week as a new treasurer, Jim Chalmers blamed his predecessors for the worst cost of living crisis in two decades.
Incoming governments typically set out to trash the reputation of their political opponents by shifting blame and downplaying their successes.
With only a bare majority, Labor wants voters to think less of the Liberal Party – which is traditionally more trusted to manage the economy.
Westpac economists are expecting the Reserve of Australia to raise interest rates five more times by Christmas, followed by another two increases next year.
Labor’s pessimistic tone about soaring inflation could potentially weaken the economy if it makes worried consumers spend less. In his first week as a new treasurer, Jim Chalmers blamed his predecessors for the worst cost of living crisis in two decades
For borrowers with a typical $600,000 mortgage – who often live in outer-suburban marginal seats – that would mean a $460 surge in monthly mortgage repayments by Melbourne Cup Day in November.
A 5.1 per cent headline inflation surge in the year to March was the worst since 2001 and at a level well above the RBA’s 2 to 3 per cent target, as a result of global supply chain pressures and $2 a litre petrol prices.
A 141 per cent annual surge in wholesale electricity prices also means bills could double from July.
Mr Chalmers, who was a senior policy adviser to former Labor treasurer Wayne Swan during the Global Financial Crisis in 2008, emphasised cost of living pressures in his first major media conference as a senior cabinet minister.
‘This perfect storm of energy price spikes is doing enormous damage to our employers, to our households and to our national economy,’ he said.
He also used the word ‘challenge’ 21 times.
‘There are far more troubling aspects in our economy: skyrocketing inflation is a big challenge,’ Mr Chalmers said.
Economist Saul Eslake, the principal of Corinna Economic Advisory, said nervous consumers listening to Mr Chalmers could potentially cut back on their spending.
‘He didn’t have to worry about that when he was shadow treasurer, he didn’t have to worry about that in Opposition,’ he told Daily Mail Australia.
‘Now that he’s treasurer, he needs to be conscious that his words carry greater weight.’
Mr Eslake said the new treasurer had a delicate balancing act between explaining economic reality without making consumers fearful about a recession or a slowdown.
Mr Chalmers, who was a senior policy adviser to former Labor treasurer Wayne Swan during the Global Financial Crisis in 2008, emphasised cost of living pressures in his first major media conference as a senior cabinet minister (pictured is a Coles supermarket in Sydney)
How Australia’s cost of living crisis is affecting YOU
INFLATION: Annual headline rate of 5.1 per cent is the highest since 2001
PETROL: Average unleaded prices are back above $2 a litre despite a six-month halving of fuel excise to 22.1 cents a litre. Transport costs in the year to March surged 13.7 per cent – the fastest pace since 1990 when Iraq invaded Kuwait
FOOD: Fruit and vegetable prices climbed 6.7 per cent as flooding along Australia’s east coast affected the supply of fresh food
ELECTRICITY: Wholesale prices rose by 141 per cent in the year to March which means consumers from July could see their bills double
MORTGAGE: Borrowers with average $600,000 mortgage saw a $78 increase in monthly mortgage repayments in May as the Reserve Bank of Australia raised the cash rate by a quarter of a percentage point. Westpac economists are expecting five more rate rises by Christmas which would see monthly repayments climb by another $460
WAGES: Pay levels in the year to March rose by just 2.4 per cent, less than half the 5.1 per cent inflation rate which meant workers effectively had a pay cut. The Australian Council of Trade Unions wants a 5.5 per cent increase for the 2.7 million minimum wage and low-paid workers on awards
‘He has to be careful, he has to draw a balance, walk a fine line between being honest and realistic about the outlook as he sees it and not unduly scaring people,’ he said.
‘You could – I’m not saying the treasurer is – bring on what you fear; if you fear that there might be a sharp or abrupt slowdown in the economy for some reason, particularly if you’re the treasurer or the governor of the Reserve Bank, then you could induce that.’
But Griffith University politics lecturer Dr Paul Williams said the typical voter didn’t blame either side of politics for high inflation, accepting it was a global problem.
‘There’s a limit to what this government can blame on the previous government,’ he told Daily Mail Australia.
Dr Williams said voters regarded inflation as a problem where governments of either side were ‘extremely limited’ in what they could do in addressing direct cost of living issues.
‘Neither party, quite rightly, offered, foolishly or wrongly or falsely offered any sort of insurance that inflation would get better under their watch,’ he said.
‘Talking down the Liberals for being responsible for inflation is not going to lower trust in government.’
In emphasising inflation, Mr Chalmers said very little about unemployment in April falling to just 3.9 per cent – the lowest level since 1974 – during the Coalition’s last full month in power.
‘We’ve got a tight labour market,’ he said.
His Wednesday media conference coincided with new Australian Bureau of Statistics national accounts data showing a 0.8 per cent expansion in gross domestic product in the March quarter.
This was much weaker than the 3.6 per cent growth surge in the final three months of 2021 but those December quarter figures followed the end of lockdowns in Sydney and Melbourne.
The 3.3 per cent annual growth pace in March was still relatively strong by historical standards but Mr Chalmers focused his political spin on how the quarterly increase was ‘a weaker set of figures than our predecessors and the Treasury anticipated at Budget time’.
A 5.1 per cent headline inflation surge in the year to March was the worst since 2001 and at a level well above the RBA’s two to three per cent target as a result of global supply chain pressures and $2 a litre petrol prices (Sydney BP service station pictured)
Big Four banks update RBA rate forecasts
WESTPAC: 2.25 per cent cash rate by May 2023
NAB: 2.6 per cent cash rate by August 2024
ANZ: 2.25 per cent by May 2023
COMMONWEALTH BANK: 1.6 per cent by February 2023
The national accounts data also showed savings ratio of just 11.4 per cent, down from 23.7 per cent in 2020 during the national lockdowns.
Retail sales have rose by 9.6 per cent in the year to April, the Australian Bureau of Statistics also revealed this week.
Mr Eslake said this demonstrated that most Australians – apart from minimum wage earners and pensioners – had built up adequate savings since early 2020 to keep spending or have a buffer to cope with several interest rate rises.
‘Australian households have quite a bit of saving that they can fall back on,’ he said.
Rising interest rates are a problem not just for home borrowers, but also the government as gross debt approaches $1 trillion as a result of Covid stimulus measures.
‘It’s certainly true that inflation has further to rise, it’s also true that wages aren’t keeping pace with inflation, it’s true that interest rates have further to rise,’ Mr Eslake said.
Within the next decade, that could mean tax increases to fund the costs of servicing government debt to fund programs like Defence, aged care and the National Disability Insurance Scheme.
Electricity prices are also set to rise with the Australian Energy Market Operator noting wholesale prices had more than doubled to $87 in the March quarter – rising by 141 per cent in a year
‘At some point that is not in the next three years, but is probably in the next 10 years, governments will have to find additional revenue from somewhere not so much to pay off the debt, what matters is whether you can absorb the interest payments,’ Mr Eslake said.
In talking down the economy for political purposes, Labor runs the risk of weakening consumer sentiment, which in turn leads to less spending in the economy and eventually a rise in unemployment as businesses take on fewer staff.
The Westpac-Melbourne Institute’s monthly reading for May produced a reading of 90.4 points – a level well below the 100 level where optimists outnumber pessimists.
This was also the worst level since August 2020 when Melbourne’s second wave lockdowns, in Australia’s second biggest city, unnerved consumers.
The prospect of more interest rate rises, as a result of high inflation, could weaken consumer sentiment even more, as a new Labor treasurer keeps talking about the mess he inherited from his Liberal predecessor, Josh Frydenberg.
‘Consumers have become more gloomy both about their financial situation and about the short and longer-term economic outlook,’ Mr Eslake said.
What YOU could be paying by Christmas
$500,000: Monthly repayments rising by $383 from $1,987 to $2,370
$600,000: Monthly repayments rising by $460 from $2,384 to $2,844
$700,000: Monthly repayments rising by $537 from $2,781 to $3,318
$800,000: Monthly repayments rising by $614 from $3,178 to $3,792
$900,000: Monthly repayments rising by $691 from $3,575 to $4,266
$1,000,000: Monthly repayments rising by $767 from $3,973 to $4,740
Data based on variable rate rising from 2.54 per cent to 3.94 per cent as the Reserve Bank of Australia raised the cash rate from 0.35 per cent to 1.75 per cent