It’s now accepted that the government’s fiscal policy is contributing to the inflation problem — something Crikey warned about way back at budget time and repeated yesterday.
Amid all the comparisons with the rate rise in the 2007 campaign, it’s forgotten that while John Howard and Peter Costello were splurging money like no tomorrow in an effort to rescue that lost cause, they were still running a budget surplus. Scott Morrison and Josh Frydenberg are running an $80 billion deficit. And unemployment is lower now than in 2007 — and inflation much higher. It’s not their job to address inflation seems to be Morrison’s approach.
The other difference is Kevin Rudd’s famous line: “This reckless spending must stop.” Whatever other flaws Rudd might have had, in a brilliant election campaign that line stood out both politically and in policy terms. There’s no Rudd now.
Instead, Anthony Albanese and Jim Chalmers are matching the Morrison-Frydenberg spendathon blow for blow. The Coalition gives a handout to wealthy seniors; Labor promises to match it. The government promises to rig the deeming rate for pensioners; Labor says us too. The only difference between the parties is that the sheer volume of pork coming from the Coalition is virtually impossible for Labor to match. But at no stage has it looked like Labor might dare to say that this reckless spending must stop.
Instead, yesterday, both Frydenberg and Chalmers — who is now looking like one of the strongest players in Labor’s team — ran a mile from offering any solution to the basic problem of the budget: we’ve increased spending a couple of percentage points of GDP beyond where it has been for decades, but without increasing taxes to pay for it. We’re pumping borrowed money into the economy and will still be doing that year in and year out, according to the budget papers, up to a decade after the pandemic.
In fact, both sides are making a virtue of that stimulus, declaring it’s needed to ease cost-of-living pressures on households. But it’s a circular argument — trying to ease cost-of-living pressures just leads to higher cost-of-living pressures.
This is the real legacy of the 2019 election, and everyone who is complicit in that debacle — both politicians and the media who enabled it — shares some responsibility. Labor went to that election with a determination to be fiscally disciplined and to be honest with voters. It promised to end tax rorts and shift tax expenditures in more productive directions. It lost the election as a result.
That entrenched what we can call the Morrison method of governing — although governing has very little to do with it. Morrison’s method is to sit on his backside and do nothing but favours for his donor mates for three years, and then launch into a frenetic campaign of bribing voters and demonising anything proposed by his opponents in order to win reelection.
Morrison has made responsible governing toxically hard. Too hard for Labor. That’s why it doesn’t dare say: “This reckless spending must stop.”
And where Labor is in power, in Victoria, it’s all for reckless spending ahead of the election there later in the year, as well.
That’s left the Reserve Bank with the donkey work of addressing inflation. And remember, interest rates don’t directly address inflation. That point was made overnight by the US Federal Reserve chair Jerome Powell, after the Fed lifted US interest rates by 0.5%.
“Our tools don’t really work on supply shocks, our tools work on demand,” he said. “We don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance and they’re … famously blunt tools.”
That is, central banks can only bash demand into submission to prevent inflation from becoming embedded in economies while they wait for factors like supply shocks to subside. And that means they bash consumers into submission, as a lot of mortgage holders are about to find out.
There’s another, uncomfortable lesson from 2007 that we also need to bear in mind. Wayne Swan was committed to ending the reckless spending in the 2008 budget — there was talk of meat axes — until he began hearing from US Treasury secretary Henry Paulson and Fed chair Ben Bernanke, and from his counterparts at IMF meetings, what was coming in terms of financial chaos. He immediately called a halt to plans for big spending cuts, leaving only some mild pruning. It was the right call — and within months, Rudd and Swan were firing up stimulus spending.
It may not be a financial crisis but the budget papers already forecast a big slowdown in growth in 2023, and the Reserve Bank agrees: growth will be just 2% next year, RBA governor Philip Lowe said on Tuesday, down from the sugar-coated 4.25% this year. But inflation will still be 4%.
Add to that the damage President Xi Jinping’s zero-COVID policy is doing to the Chinese economy. There is talk that Shanghai may be able to leave lockdown soon, but restrictions in other cities, including Beijing, continue to ramp up. Australia’s problem over the next year might not be that China is too strong, but that it’s too weak.
Frydenberg (or his replacement, if he loses his seat but Morrison still wins) or Chalmers will have to engage with the challenge of addressing the structural deficits with one eye on the possibility of a serious slowdown in growth. At least Chalmers can ask his old boss for some tips.
This is all the toxic legacy of Morrison and his smirking, substance-free political opportunism. We’ll be paying the price for quite some time to come.
