Australia is being flooded with economic updates this year. Former treasurer Josh Frydenberg included the usual forecasts in his last budget in March and then the pre-election fiscal outlook revised them a month later.
On Thursday, new Treasurer Jim Chalmers gave an economic statement with new forecasts but they will be superseded in October when he announces his first budget. Then in December, the Treasury will release even more forecasts in the traditional mid-year economic and fiscal outlook.
Chalmers has justified his one-off release of economic forecasts, without a budget, by saying that he wanted to give people “the best sense we can of what is really going on” rather than “tiptoe around the pressure that people are under”.
Chalmers went out of his way to talk up the “confronting” aspects of the outlook. It is true that some measures of the economy have moved in a worrying direction since April, especially inflation. Prices are now forecast to rise by 7.75 per cent in the year to the December quarter and the forecast for the 2022-23 financial year is a rise of 5 per cent, much higher than 3 per cent expected in April. Wage growth will lag well behind and living standards will fall.
Yet Chalmers’ economic statement also includes signs of strength. Unemployment is expected to remain very low at just 3.75 per cent this financial year and economic growth will be close to trend at 3 per cent. Even Chalmers admits that Australia is outperforming much of the rest of the world.
More information is always useful but it is hard to understand what practical point Chalmers hopes to make by this economic sob story.
When Chalmers was in opposition and trying to savage the Morrison government, he had a clear interest in painting a bleak picture of the economy.
But the danger with talking up the negatives is that if the government keeps saying things are tough he encourages people to expect government support and undercuts the case for taking hard decisions.
In fact, Chalmers has good reasons to try to cut some fat out of the budget in October. First, with inflation rising, he should try to cut spending to reduce demand. Timely budget cuts or tax rises reduce the need for the Reserve Bank of Australia to raise official interest rates. “We shouldn’t make it harder for the RBA on the demand side,” as Chalmers said in his speech.
More importantly, as Chalmers also pointed out, Australia needs to make a start in reining in the structural budget deficit and paying back the $1 trillion in government debt that was the price of keeping the economy on track during the pandemic.
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