Opinion
Chalmers has navigated a steady course. But can he nail a tricky landing?
Peter Hartcher
Political and international editorJim Chalmers sees himself at the controls of an aircraft. He’s bringing it in for a tricky landing. “There’s volatility, there are crosswinds, the windsock is blowing all around the place,” the treasurer tells me.
The plane, of course, is the Australian economy. The crosswinds are the forces at work in the world. And the tricky part? He has a short-term aim as well as a longer-term one and he’s trying to focus on both in next week’s budget.
Illustration by John Shakespeare.Credit:
In the short run, he needs to pull off a soft landing – that is, a glide path to bring down inflation without slamming the economy into the tarmac – while looking to Australia’s longer-term growth needs. Or, as he puts it: “I need to balance a soft landing and keeping eyes on the horizon because we have generational responsibilities.”
He wondered whether this was an actual thing in the aviation world, and discovered that it is: “There’s a pilot term for having eyes on the horizon while guiding onto the runway – a stabilised approach.”
The metaphor works for Chalmers because, he says, this budget involves a series of fine balances. Which is much more elegant than the metaphor I’d pictured. The government this month enters its third and final year before it must go to the polls, a time of powerful impulses to distribute pork. But with the constraint of unquiet inflation, I imagined a treasurer trying to hand out pork while wearing handcuffs. Difficult.
But, to the government’s credit, it doesn’t even seem to be trying to dish out much extra pork.
“There’s relatively little” pork, based on everything we know so far, says noted budget hawk Stephen Anthony of Macroeconomics Advisory. “It’s rats and mice stuff.”
And while that’s a lot of animal life jammed into a single metaphor, the plain point is that the government appears to be trying to be serious about the inflation problem, with the important caveat that we won’t get to see the full budget until Chalmers stands up at the dispatch box at 7.30pm on Tuesday.
What’s the story? Treasurer Jim Chalmers faces the Canberra press pack on Friday.Credit: Alex Ellinghausen
The fearlessly independent economist Saul Eslake’s comment on the volume of visible election pork in this budget? “I’ve seen worse,” he says. “There’s increased political pressure on the government to be seen to do something about inflation, and it’d be incredibly naive for the government to ignore that.”
It’d also be completely counterproductive. Chalmers isn’t the only one in the cockpit. His co-pilot is the Reserve Bank governor, Michele Bullock. Chalmers controls spending, but Bullock controls interest rates.
If the treasurer goes too easy on inflation by excessive use of the joystick marked “spending”, the governor will simply countermand it with the blunt instrument labelled “higher interest rates”.
The government would be blamed; the economy’s flight path would be destabilised. The consequences? Probably a rough landing for the economy and a potentially fatal one for the government.
In any case, can a government really “buy” votes with handouts and spending? Only politicians think so. When the people have had enough of a government, no amount of cash will save it.
John Howard splurged his way to oblivion. Budget nights in his last term were like “Christmas night in the pirates’ cave” in Stephen Anthony’s memorable phrase, yet the people buried Howard when they’d had enough of him.
“This budget involves a series of fine balances” for Chalmers and Prime Minister Anthony Albanese.Credit: Alex Ellinghausen
Likewise, spending bonanzas didn’t save Julia Gillard or Scott Morrison. Voters are practical and will take the money when it’s on offer, but they are not gullible enough to vote for the politician who’s desperate enough to give it to them.
Next week’s budget does contain one big act of largesse – the stage 3 tax cuts which, reworked by Labor, will go to every income taxpayer, with an average value of $1888 a year, effective from July 1.
“Those were coming anyway,” says Eslake. “They were legislated six years ago. As far as I know, the government’s not throwing cash at everyone, they’re not throwing extra tax cuts at everyone, there’s no sign of Bridget McKenzie’s sports rorts, no sign of the Liberals’ car parks” – affectionately nicknamed “car pork” by Labor.
Chalmers makes the point that the effect of the tax cuts already are factored into inflation forecasts.
Anthony and Eslake do have sharp criticisms of some key aspects of the budget, but not its short-run inflationary effects.
Chalmers assures: “The budget will put downward pressure on inflation in the short term.” He offers these indicators of intent: “We are banking” – not spending – “almost all the revenue upgrades, more than 90 per cent” for the current financial year, ending on June 30. The political reward for this restraint will be a budget surplus, the second in a row.
Chalmers contrasts this with the decade of Coalition rule, where only about 40 per cent of windfall revenue was saved, on average, and the bulk spent. The last time a Coalition government produced a surplus, Peter Costello was treasurer.
The budget will offer various measures to ease the cost of living, much as last year’s did. Rebates on household electricity bills, for example. But because they’ll take the form of refunds on bills, rather than cash-stuffed envelopes ready to be spent, they won’t add substantially to inflation.
“I genuinely believe,” says Chalmers, “that if you set the budget to the economic cycle, the political cycle will take care of itself.”
Mind you, Chalmers’ belief could be tested again soon. If the government runs full-term to next May, it’ll have another opportunity to pander to the people with pork offerings in an early budget before the election.
But beyond trying to settle inflation in the short term, Chalmers will seek to cushion any economic slowing – seeking a soft economic landing – with increased spending in the months and years ahead.
How much extra spending? Until Tuesday, we only have this assurance from Chalmers: “The real spending growth in the budget will be just 1.4 per cent over the six years – the two years gone and the four years ahead.” That “real” spending means outlays after adjusting for inflation.
“That compares with real spending growth averaging 4.1 per cent under our predecessors and 3.2 per cent [on average] over the last 30 years. So real spending growth in the budget will be around a third of our predecessors and less than half the average of the last three decades.”
Then there’s Chalmers’ eye on the horizon – the longer-term creation of a new growth model, as he calls it. In other words, the Future Made in Australia plan.
This brings us to the criticisms that the fiscal hawks Stephen Anthony and Saul Eslake make of the budget due on Tuesday. “It’s not so much Christmas night in the pirates’ cave,” says Anthony, “it’s more like May Day at the Politburo.”
Meaning? “I picture them as cold-blooded central planners carefully directing resources to nationalised industries through their planning apparatus.”
Eslake doesn’t quibble with the government’s investments in the energy transition to deliver its carbon emissions goals. But he is sceptical of other government investments such as the $1 billion for the manufacture of solar panels in Australia.
“Pork,” says Eslake, “I would describe as everything under the heading of Future Made in Australia. Call me a flat-earther, if you like, as the prime minister has done, but I call it manufacturing fetishism.”
The government has a starkly different view. It sees a global competition for private capital on a grand scale. Many of the major developed nations – the US, EU countries, Canada, South Korea and Japan, as well as China – have announced vast subsidy programs to woo capital to invest in their economies.
Chalmers: “It’d be mad to think we can curl up in a ball and pretend it’s not happening.” The government is determined that Australia wins its share of the global state-assisted investment boom now under way.
It’s wrong to see it as a nationalisation policy; government support “is to facilitate private investment”, says Chalmers. “All we can do is a sliver of the investment needed for the transition to the new model. We are not repudiating the orthodoxy, but the orthodoxy changes when the world changes.”
Chalmers has foreshadowed budget announcements of investment incentives for priority sectors. “We are trying to do something,” says the treasurer, “that will dramatically outlast the budget and the government and leave behind a new growth model.”
High-flying, indeed.
Peter Hartcher is political editor.