The Federal Treasurer backs long-term wages growth, untangling supply chain issues and helping with childcare costs to help lift Australia's economy as the nation grapples with the largest increase in cost-of-living pressures in two decades.
Look back on today's updates in our live blog.
Key events
- What do the updated forecasts mean in reality?
- Inflation is now expected to peak at 7.75 per cent
- Economic plan's three focus points to help lift the economy
- Unemployment rate expected to remain low until 2023: Chalmers
- Watch Jim Chalmers' economic update
- Shadow Treasurer urges government to cut spending after revised growth figures
Live updates
By Shiloh Payne
We're going to close the blog here
Thank for joining us.
You can keep up to date with the latest news here on the ABC News website and on our app.
By Shiloh Payne
What do the updated forecasts mean in reality?
Here's ABC business reporter Michael Janda:
These are the key takeaways from Treasury's updated economic forecasts:
- The cost of living is likely to rise even faster before price increases start slowing down next year.
- Interest rates are likely to rise further, probably by at least as much as they already have, as the Reserve Bank tries to get those price increases under control.
- What you can afford to buy with your pay packet is likely to keep shrinking for at least another year, even though wages growth is expected to pick up helped by the Fair Work decision to give minimum wage workers a 5.2 per cent pay rise and award workers a 4.6 per cent increase this year.
- The economy is not only expected to avoid recession, but to keep growing reasonably solidly for the next few years at least.
- That forecast for the economy to keep growing, if correct, means that unemployment will stay close to the current 48-year lows, even if it edges up slightly to 4 per cent over the next couple of years.
The big elephant in the room? How much rising interest rates will hit the housing market.
The banking regulator APRA just released the "Incoming Government Brief" it provided to the new Labor government when it took office in May, after a freedom of information request.
In it, APRA noted that "risks in housing markets are heightened" and the sudden move to sharply rising interest rates is likely to "place a number of households in financial distress". There was no estimate on just how many households this might be.
What will the government do if house prices fall more than 15 per cent, as many economists are now forecasting, and a significant number of recent buyers with big mortgages start defaulting or getting in arrears on their loans because of the sudden jump in mortgage rates?
Australia's economy has been quite dependent on housing construction and the consumption tied to new homes and rising house prices for its growth, so what will happen if that all falls away very quickly?
By Shiloh Payne
Here's Andrew Probyn's analysis on the economic outlook
ABC political editor Andrew Probyn has analysed the details of the first economic update:
By Shiloh Payne
Senator: Government to invest in areas that will help economy
Labor senator Katy Gallagher is also speaking on News Channel, she's the Minister for Finance.
She says the government has to invest in a number of areas to help the economy, these include:
- cheaper energy
- childcare
- medicine
- cost of living relief
Gallagher also says the government needs to deal with supply issues and create more skills.
By Shiloh Payne
So why raise interest rates to tackle inflation?
So if we're faced with cost of living pressures, why raise interest rates? If inflation is due to the war on Ukraine and covid- related manufacturing and transport issues, why raise interest rates to control it? Why attack something that's not the cause?
- Leo
Hey Leo,
Thanks for your question, here is how ABC business reporter Michael Janda puts it:
In short, because it’s been made the Reserve Bank’s job to keep inflation under control and interest rates are pretty much the only tool they have to do so.
Since the early-1990s the Reserve Bank, with the agreement of the government, has aimed to keep the inflation rate – that is the level of price increases – roughly between 2-3 per cent each year.
It’s currently 6.1 per cent and expected to climb to 7.75 per cent, so clearly the RBA feels like it has to do something.
The only thing it really can do is raise interest rates. That makes debt more expensive, so we borrow less to spend, but it also means that existing debt becomes more expensive, so people with mortgages will have less money left over to spend on other things.
If lots of people cut spending, that should cause prices to fall, or at least to rise less quickly.
Unfortunately, it also means rising unemployment, and the possibility that some people who can’t afford their higher mortgage repayments lose their homes.
There is an alternative, and that is the government taking more responsibility for managing the economy.
This hasn’t really happened since the Hawke/Keating era.
If the Albanese government chose to go down this road, it could either cut spending or raise taxes to try and help the Reserve Bank take some demand out of the economy.
This can also be more targeted.
One option, for example, would be to increase taxes that target wealthier households who may be struggling less with the rising cost of living (for example by cutting the capital gains tax discount or increasing taxes on large superannuation balances) and using that revenue to help lower-income households, such as the unemployed, cope with the rising cost of living.
This would reduce the spending capacity of wealthier households that are more likely to spend money on non-essential goods and services, while ensuring lower income households can still afford to buy the necessities.
This is in contrast to interest rates, which are what economists describe as a ‘blunt’ policy tool – they affect everyone in the economy, for better or worse.
This an issue that the Reserve Bank review could potentially look at, and I wrote about it in more detail last week:
By Shiloh Payne
Nationals senator: Government needs to do more
Nationals senate leader Bridget McKenzie is speaking on News Channel.
She says Australians were told during the election that the Labor party had a plan to give real wage increases to Australians.
"Australians believed them and they were elected on those promises," she says.
"And unfortunately, we are seeing that they don't have a plan to deal with that."
"We were very clear up front that the pressure globally was going to severely impact not just our economy but the live and we're seeing that inflation is on the rise."
By Shiloh Payne
Treasurer lists three steps to lift the economy
We mentioned them earlier, but the Treasurer listed three key steps he wants to take to lift the economy.
Here they are in his own words:
By Jessica Riga
Analysis: 'Labor can argue it didn't create this mess, but it's been voted in to try and fix it'
Let's continue to debrief on the Federal Treasurer's State of the Economy address with ABC political editor Andrew Probyn.
"In terms of politics, we saw this with the Howard-Costello government, and I include Costello in that because he was dealing with what he described as Labor's $96 billion blackhole. That was his way of blaming the previous Labor government. What is happening now is some of the attempted blame shifting.
"Labor might be able to argue that it didn't create is mess but it has been voted in to try and fix it, which has been acknowledged by the Treasurer, it's just that this job is really, really big.
"This is a problem that has many causes, some of which were not the Coalition, which was acknowledged by the Treasurer. Russia's invasion of Ukraine, the fact that in Beijing they are trying to pursue COVID zero.
"Growth is well below [6 to 7 per cent] in China at the moment, and that is having a big effect on our economy.
"Politically, it will start biting on the Labor Party, because the rhetoric about not blaming us for the mess we're in is going to wear thin."
By Shiloh Payne
Inflation is now expected to peak at 7.75 per cent
Jim Chalmers has concluded his update, here's business reporter Michael Janda's take:
The Treasurer has laid out some pretty dramatic changes to the economic forecasts produced by Treasury since the pre-election fiscal outlook released less than four months ago.
The big change is to inflation. Treasury’s forecast under the previous government was 4.25 per cent, but it now expects annual price increases to peak at 7.75 per cent by the end of this year.
That’s quite a bit higher still than the 6.1 per cent for June that was released by the Bureau of Statistics yesterday.
The Reserve Bank wants to get inflation back down to between 2-3 per cent per year, and Treasury expects it will take another two years for that to happen. And that is after what is likely to be at least another 1-2 percentage points of interest rate rises.
As rates and the cost of living go up, economic growth is expected to be weaker, with Australians tightening their belts and not spending as much.
Treasury has taken half-a-percentage-point off its gross domestic product (GDP) forecasts for the financial year just ended, the current one and the next one.
Economic growth this financial year is expected to be 3 per cent and just 2 per cent next financial year.
That is likely to see unemployment start to rise from the current level of 3.5 per cent, which is the lowest rate since 1974.
Unemployment is forecast to rise back to 4 per cent – still extremely low by recent standards – by the middle of 2024.
Despite the small rise in unemployment, the government has lifted its wages forecasts, also by half a percentage point, to 3.75 per cent this year and next.
But, with inflation still at 5.5 per cent in mid-2023, it will take at least another year or more for wage growth to exceed the rising cost of living.
By Jessica Riga
And here's our first interjection from across the floor
Jim Chalmers has had a pretty silent audience so far, but this line caused a stir from the opposition.
"Mr Speaker, Australians are paying a hefty price for a wasted decade. They know the new government didn't make this mess, but we take responsibility for cleaning it up..."
He's briefly cut off by some shouting from the Coalition but continues on.
"The scope and the scale of the challenges left for us to tackle, some parts known and others made clear, these challenges are confronting for all Australians. We are not daunted by them. In these first few months, we have also been competent, encouraged and energised by the sense of cooperation and common purpose that Australians share."
By Shiloh Payne
Economic plan's three focus points to help lift the economy
The Treasurer has outlined three key focal points he says will help the economy, they are:
- help Australian with the costs of living by cutting childcare costs for approximately 1. 6 million families and reducing barriers for parents overwhelmingly women, to work additionally hours and by cutting the cost of medicines on the PBS by up to $12.50 a prescription.
- grow wages over time by successfully arguing for a decent pay rise for the lowest paid.
- unclog and untangle our supply chains and deal with the supply change of the inflation challenge by investing in cleaner and cheaper and more reliable energy.
By Shiloh Payne
Chalmers on budget repair
Jim Chalmers says the budget that the government inherited is "booby-trapped by expiring measures".
He says COVID spending has so far cost the budget $1.6 billion this year alone.
"We expect that government payments will be around $30 billion higher than was forecast pre-election because of inflation and wage expectations and how they flow through," Chalmers says.
By Jessica Riga
Unemployment rate expected to remain low until 2023: Chalmers
"The unemployment rate is expected to remain low for the later half of this year before returning to 3.75 per cent by June 2023 and 4 per cent by June 2024," Chalmers says.
By Shiloh Payne
Wage growth not the reason for high inflation, Chalmer says
Chalmers says energy prices have been pushed up because of a decade of "energy policy paralysis" with not enough investment in clean, cheap and reliable energy.
He says real wages growth is not the cause of inlation, Chalmers says, with growth averaging 0.1 per cent a year over the past decade.
"In the year to March, real wages for fell to 0.7 per cent. The worst result in more than two decades," Chalmers says.
By Jessica Riga
Some conditions causing inflation are 'out of Australia's control': Chalmers
"Some of the conditions determining this inflation problem are outside of Australia's control and largely unavoidable," Chalmers says.
"As much as we can provide support, we can't control the war in the Ukraine. The floods and a new COVID variant brought the supply chain and worker absences that we have been experiencing.
"But there are things we can control.
"But let's be really clear about something: inflation is high and in the near term will get higher, but the primary cause of this is not higher wages. Nowhere near it."
"We don't have an inflation problem because workers are earning too much or because we are in some kind of wage price spiral. Real wages growth over the past decade has averaged 0.1% a year."
By Shiloh Payne
Jim Chalmers is giving his update
The treasurer says there is "no use tiptoeing around the pressure that people are under".
Chalmers says the economy is growing but so are the challenges.
"The global picture is complex and the outlook is confronting," Chalmers says.
He says some impacts include COVID-19, ongoing conflict and war and clogged supply chains.
By Shiloh Payne
Watch Jim Chalmers' economic update
Federal Treasurer Jim Chalmers is delivering his economic update to parliament, you can watch it here:
By Shiloh Payne
APRA warned the government about 'heightened' housing risks
Here's the latest from business reporter Michael Janda:
The banking regulator warned the incoming Albanese government that it would face "heightened" risks in the housing market as interest rates rise.
The warning came in the incoming-government brief prepared for the new Labor government when it took office in May, and was made public as the result of a freedom of information request by the Australian Financial Review.
The 48-page document laid out a range of issues APRA was looking at across the banking, insurance and superannuation industries it regulates, but housing was front and centre.
"Risks in housing markets are heightened," the report warned.
"A sustained period of record low interest rates has seen strong growth in housing prices in recent years and this has been high relative to advanced economies globally. Households' debt levels relative to income are also elevated, both historically and internationally."
Even though interest rates had only just started rising in May, when the report was written, APRA cautioned that more expensive mortgages would put some borrowers in financial trouble.
- You can keep reading this story with the link below.
By Shiloh Payne
Analysis: How bad will the economy get?
Here's the latest analysis from David Speers:
The 6.1 per cent annual inflation result took no-one by surprise. Economists, markets, Treasury, and the Reserve Bank all expected a number roughly where it landed. That doesn't make it any easier to manage.
It will lead to more interest rate rises and, we're told, the inflation problem will get worse before it gets better.
Since stepping into the role as Treasurer, Jim Chalmers has been gradually dampening expectations of when workers can expect to see some improvement in their standard of living. He's now conceded the obvious: there won't be any real wage growth in the "near term".
So, when might we see some improvement? We should have a better idea today when Chalmers provides updated forecasts as part of his long-promised economic statement to parliament.
He'll downgrade forecast economic growth by 0.5 per cent for the last financial year, this financial year and the 2023-24 financial year, largely thanks to the global slowdown and higher interest rates taking their toll.
It's unclear what the new forecast will be for the arrival of elusive real wage growth, but the Treasurer is cautiously predicting it will happen "in this term of parliament" (a forecast Labor will be desperately hoping proves accurate).
- You can keep reading this story with the link below
By Jessica Riga
Government expects inflation to exceed seven per cent this year, Chalmers says
During his rounds with the media this morning, the Federal Treasurer told the ABC the government expects inflation to exceed seven per cent this year.
He says while the nation is not expected to go into recession, the cost of living will get worse before it gets better.
"Australians can expect inflation will go higher than seven percent this year," Chalmers said.
He said inflation will "likely peak" this year before it will "start to moderate."
