Paul Keating described the recession of the early 1990’s as ‘the recession we had to have’, as he battled economic headwinds through a mix of micro and macroeconomic policy.
Jim Chalmers has delivered a budget that may have to be spun as the ‘recession we will have regardless’. As experts warn fiscal measures will not be enough to address economic strife.
“Last year, our responsible economic management delivered the first surplus in 15 years,” Chalmers declared on the floor of parliament on Tuesday night as he delivered the 2024-25 budget — his third.
While this may sell his ability to manage an economy to Australians in the lead-up to an election, economists point out the surplus is primarily the result of good luck rather than sound economic management.
“The surplus is due to increasing taxes via bracket creep in addition to minerals and resources,” said Mark Humphery-Jenner, associate professor of finance at UNSW Business School.
“The government has shown no appetite, or ability, to reduce spending and fix the structural deficit.”
While inflation is falling, it remains a concern and has proven difficult for the government to bring in line with the 2-3 per cent target set by the RBA.
Economic growth is declining, coupled with unemployment that is predicted to rise across the next year. With an election due for May next year at the latest, the government has had to spin cost of living relief for its voter base while also keeping spending down. So as not to set off inflationary pressures anymore through high spending. A juxtaposition.
The government’s signature piece has been a non-means tested $300 subsidy per household on electricity bills. This will be paid straight to retailers and taken out of householder’s electricity bills. As there is an energy component to all goods and services produced the government is hoping this policy reduces inflation and ultimately interest rates.
“Energy bill relief and rent assistance are estimated to directly reduce headline inflation by 0.5 per cent of a percentage point in 2024–25 and are not expected to add to broader inflationary pressures,” announced Chalmers.
The government is being led down this fanciful path more by ideology than by economics.
Humphery-Jenner disagrees: “It is disingenuous to argue that the handouts reduce inflation, the handouts do nothing to address the underlying supply and demand factors that cause prices to increase.
“Jim Chalmers either does not understand inflation or is misleading voters. He asserts that the subsidies reduce inflation. This is misleading at best. The handouts do nothing to address the underlying supply and demand factors that cause prices to increase. Thus, even if there is an immediate reduction in what people pay, the prices will continue to grow. The RBA sees this and it is disingenuous to argue that the handouts reduce inflation.”
To address these underlying factors, the government would need to deploy effective microeconomic policy, which Chalmers would struggle to explain to his voter base by May, as Paul Keating did a generation ago.
According to Chalmers the $22.7 billion invested over the next decade in the Made in Australia plan will “help make us an indispensable part of the global net zero economy – a crucial part of a growth agenda”. The policy would help cement the Albanese government’s commitment to net zero by 2050 along with a declaration it “will demand the biggest transformation in the global economy”.
While economists see a place for alternative energy sources, some doubt if net zero is realistic.
“The government is being led down this fanciful path more by ideology than by economics, I expect the “stop all fossil fuel use by 2050” parade to collapse under its own economic impossibility far before 2050,” said Gigi Foster, professor of economics at School of Economics, UNSW.
“It is costing Australia a lot of money and human welfare to continue to have a float in that parade.”
While the government hopes to reduce inflation, the reduction in consumer spending is stinging businesses across the country. A total of 1,136 businesses failed in March compared to 968 in February and 555 in January.
In industries like hospitality, a million workers are employed. If businesses that employ them can’t survive, neither will their jobs.
When government attempts to ‘pick winners’, it tends to distort the market and wastes money.
Since the cost of living crisis sunk its teeth into the lives of Australians, publican Benny Johnston admits: “People aren’t coming out as long, instead of buying six beers, they are buying two.
“Our patrons understand we do a CPI increase twice a year, and we try not to increase prices unless absolutely necessary,” he added, admitting that the “middle class and lower socio-economic people in Australia need breathing room”.
Supply chain costs have forced him to source from breweries within walking distance.
“We don’t buy Victoria Bitter, Carlton Draught, and Tooheys New anymore because they are expensive,” he said. “We stick to local suppliers, and when I say local, I mean walking distance, and we just try to get the best possible deals, so we don’t have to gouge our customers, and our beer supplies aren’t gouging us.”
Chalmers delivered a $325 energy bill rebate that will affect 1 million small businesses in Australia, as well as a continuing business ability to write off assets up to $20,000.
Humphery-Jenner saw the injections, particularly the $300 government rebate for households and the Made In Australia plan, as “inefficient government intervention in the economy”.
“When government attempts to ‘pick winners’, it tends to distort the market and wastes money,” he added. “This is because the government is essentially one gigantic ‘agency conflict’ whereby ministers, and central planners, spend other peoples’ money and neither gain nor lose from conserving taxpayers’ funds. Rather, they only gain from being re-elected.
“Similarly, government is notoriously bad at rewarding hard work and acumen, often lacking the bonuses one would find in the private sector. This means their objective is not aligned with that of the money-providers.”
The ALP will be watching closely the next RBA cash rate announcement on June 18.
Main image Wikimedia & RJP/Flickr.
