As economic statements go, Jim Chalmers’ speech to parliament on Thursday was not a lot more than an update of Treasury forecasts.
We learned that Australia’s GDP growth would be slower, inflation higher and jobless rates lower – but only marginally – than predicted just prior to May’s federal election.
The revised predictions hold some import but carry less weight than the data the Reserve Bank of Australia will rely on for its quarterly statement on monetary policy due for release on 5 August. Future RBA rate rises will hinge on them.
Chalmers’ numbers will also be updated in the out-of-cycle budget he will bring down in October. And our volatile era of viruses and violence mean only so much store can be placed in economic estimates for years to come.
However, while his speech may have lacked surprises, it nevertheless lays down markers for what’s to come, both in the budget and beyond. Chalmers is seeking to distinguish his approach from the near-decade of Coalition rule that preceded it.
Anyone hoping for extra cost-of-living relief would have been disappointed but probably not surprised. Chalmers will probably save any sweeteners – if there are any – for his budget, but there is actually little room for the government to move.
Childcare support, cheaper medical prescriptions and spending on a modernised electricity grid to allow faster take-up of low-cost renewable energy were his main offerings that we’ve heard about before.
“They are very boxed in by election promises,” says John Hawkins, a senior lecturer at the University of Canberra who served as a senior economist with both Treasury and the RBA. That means the fuel excise cut – costing $3bn for just six months – won’t be extended and nor will the low- and middle-income tax offset.
“Even if they do try to give people money to compensate for the cost of living pressures, that’s just going to stimulate the economy more,” Hawkins says. To spend more would be having the “RBA jumping on the brake and the government jumping on the accelerator”.
Chalmers’ speech, though, was partly aimed at massaging expectations, particularly for workers anxious their wages are not keeping up with inflation – in fact are falling further behind.
For now, the treasurer is projecting 2023-24 as the year wages finally grow faster than headline inflation. By most estimates, there is a lot of slippage to claw back.
Using the full updated figures out to June 2026 supplied by @JEChalmers today. By then real wages will still be around 1.5% below where they were before the pandemic.
— Greg Jericho (@GrogsGamut) July 28, 2022
(Real wage falls take a long time to recover) pic.twitter.com/se33lfdXi0
We’ll get an update of how much wages rose in the June quarter when the wage price index is released by the Australian Bureau of Statistics on 17 August. The March quarter WPI was 2.4% and Chalmers’ update on Thursday pencilled in 2.75% for the year to June.
“It’s surprising how little acceleration there has been in wages at a time when the unemployment rate is down to 3.5%,” Hawkins says.
That may change as employers bid against each other to fill vacancies. Still, the Treasury estimates only project WPI quickening to 3.75% by June 2023 – a level it will hold roughly firm for the years out to June 2026.
Another constraint on the budget – and hence, on Chalmers’ inclination to spend – are the mounting costs. The rising bill for Australia’s trillion-dollar debt will outpace the NDIS and another demands. Defence, which Chalmers did not refer to, will also command a growing mountain of money.
However, as Cherelle Murphy, the chief economist for EY Australia, notes, there remain “a lot of positives in the economy”.
“We do have a very highly employed labour market and we’ve got the highest workforce participation rate in history,” Murphy says. Households remain “very well buffered from the impact of Covid” with some $250bn salted away that they can drawn upon.
Interest rates, while on the rise, also remain “quite low”, she says, and there is no indication the spectre of recession is stalking Australia as it is many other rich nations.
Commodity prices may be on the skids – particularly for iron ore – but they are still at historically high levels – particularly for coal – and that will support government coffers.
Treasury, for instance, continues to bank projected royalties for iron ore at US$55 (A$79) a tonne for iron ore, US$130 for coking coal and US$60 for thermal coal.
Compare those numbers with current market rates above US$100 for a tonne of iron ore. Both types of coal are at or above US$300 a tonne, thanks mostly to the sanctions for Russia’s invasion of Ukraine and subsequent scramble to diversify energy sources.
Murphy notes coal alone delivered the recent Queensland budget $5.7bn that it wasn’t banking on. “That’s a lot of money for a state government as a surprise,” she says.
Still, Chalmers is left with a “really tough balancing act”, with a lot of extra demands to come, not least from the Covid front. There it’s already having to set aside an extra $750m with more likely to be needed, Murphy says.
And to the extent Chalmers’ statement was about attributing blame for what ails the economy and budget on the Coalition, that job is probably not quite done, Hawkins says.
The last Morrison government budget relied on annual productivity gains of 1.5% to underpin its growth and other estimates. However, that rate was only seen in the more reforming era of Hawke-Keating and the early years of Howard and Costello.
“There’s no sign that surge is going to be repeated,” Hawkins says. That correction is one adjustment Chalmers may yet have to make if he’s to draw a line under the Coalition’s era of economic management.
