SYDNEY — Prime Minister Scott Morrison has put economic stewardship at the center of his bid for a come-from-behind win in Australia’s May 21 ballot.
On paper, he has a good story to tell: The $1.6 trillion economy is larger than before the pandemic and set to expand 4.25% this fiscal year; unemployment is expected to hit 3.75% in the third quarter, a level unseen since the early 1970s; and soaring property prices mean households are wealthier than ever.
But the economy is also his Achilles' heel, with rising rents underscoring the gap between accelerating inflation and still-slow wage growth. There have also been stumbles ranging from a delayed vaccination rollout to a bungled, politicized response to recent floods that have eroded public support.
“There is a lot of frustration that wages have not risen in a meaningful way over the past decade,” said Brendan Coates of the Grattan Institute, a think tank. “There are big concerns about cost of living right now.”
Coates adds that if the Reserve Bank of Australia responds to surging inflation with higher interest rates as expected, “the government is going to take a lot of heat.”
Most economists predict the central bank will raise its cash rate by 15 basis points to 0.25% in June, while financial markets see some chance of a move next month, or right in the middle of the campaign.
Morrison sought to soothe the economic pain of higher prices and weak pay gains in the March 29 budget with cash handouts and a six-month cut in gasoline excise. While the budget was fairly well received, it doesn’t seem to have significantly improved the government’s standing in opinion polls.
Many Australians now expect rate rises after more than a decade without them. Market pricing shows a series of rapid RBA hikes from July to December to take the cash rate to 2% by year’s end, with it then reaching 3% by April 2023.
That scale of increase would put an immense burden on households who have nearly $2 trillion (Australian) in outstanding mortgages. Bloomberg economist James McIntyre warned that some borrowers would buckle under the strain if traders’ expectations came to pass.
“The rates market is pricing such an incredibly unrealistic degree of tightening,” he said, adding it would make the higher repayment buffers lenders are required to use to assess applications almost redundant. “It will blow through the prudential regulator’s lending standards.”
House prices across Australia have soared in response to ultra-loose monetary policy designed to support the economy through the pandemic. While that has boosted the wealth of homeowners, it has exacerbated affordability issues for first-time buyers and lower income earners.
Many of Morrison’s difficulties are reminiscent of those faced by his Liberal-National predecessor, John Howard, in the 2007 election. Howard opened his campaign pledging a jobless rate with a “3” in front, was hit with a rate hike in the middle of it and struggled to win back voters angered by rising costs.
While very low unemployment is positive as it gets people on the fringes of the labor market back into work, at a political level the faster inflation associated with it tends to alienate voters and often outweighs the social benefit.
History repeating itself isn’t confined to the conservative side. The opposition Labor party, which leads in opinion polls, may find that if victorious it will be constrained from doing much additional spending. The budget deficit remains large, the national debt is at a record and repayments will climb together with interest rates, while inflation further argues against additional fiscal outlays.
That continues a history dating back 50 years that has hamstrung incoming Labor administrations. In the early 1970s, it was the oil-price shock and stagflation; in the early 1980s, it was a double-dip recession; and in 2007, it faced the global financial crisis in 12 months. The current outlook suggests a new left-wing government would have to err on the side of fiscal restraint.
Another issue for both sides is pandemic fallout on women and young people, as well as sectors such as tourism, the arts and small business.
A report by Australian Catholic University found demand for social service providers in Victoria state, which endured some of the longest coronavirus lockdowns in the world, has surged. The number of people with no income seeking “emergency relief” by the end of 2021 was more than double pre-pandemic levels, it found.
That’s despite massive government spending during the pandemic that forced Morrison to dump a long-cherished goal of returning the budget to surplus.
Anne Tiernan, adjunct professor of politics at Griffith Business School, said the government has “lost the benefit” of being focused on budget surpluses.
“So, it’ll be interesting, after 12 years of talking about debt and deficit, to what extent will the opposition’s critique of the quality of recent government spending will cut through the prime minister’s claims about superior economic management,” she said.
