Economists are pushing back hard against the government’s claims of “responsible” economic management, pointing fingers at reckless and “poorly constructed” spending policies as the real culprits behind Australia’s inflation woes.
In a note on Thursday, GSFM’s Stephen Miller put it bluntly: “The RBA’s inflation containment task continues to be frustrated by counter-productive government policies despite some tortured political commentary that denies that circumstance”.
For months now, Treasurer Jim Chalmers has insisted that Labor’s economic management is “responsible”, that the government has struck “the right balance”, and that it has prioritised the fight against inflation without “slashing and burning” in the budget.
“What we have shown is we can fight inflation, the economy can continue to grow, albeit weakly, we can keep the labour market in relatively good nick, and we can balance all of the risks in the economy, including in the labour market,” the Treasurer said after the latest GDP print revealed a recession in the private sector, offset by public spending.
But seeing the data for what it is, economists don’t agree with Chalmers.
According to Miller, “fiscal laxity has exacerbated inflation pressures and led to a delay of interest rate relief”.
Miller criticised Australia’s wage-setting and industrial relations regulations, as well as excessive and “poorly constructed” government spending, particularly at the state level, noting that they are likely to exacerbate inflation by increasing aggregate demand.
“The Future Made in Australia measures may well have a similar effect,” Miller said.
“As will a swathe of other productivity sapping and opaque regulatory arrangements,” he added.
While accepting of the fact that fiscal policy has a remit that goes beyond inflation containment to encompass distributional, welfare and other objectives, Miller said much of the increased spending is “poorly constructed and unlikely to realise its stated objectives”.
“Government spending is likely to increase aggregate demand by a chunky couple of percentage points of GDP in 2024–25, thanks largely to big-spending state governments erroneously purporting to provide cost-of-living ‘relief’,” Miller said.
Like Miller, HSBC’s Paul Bloxham drew attention recently to public sector job creation and growing public demand in the economy.
Responding to the latest job’s print, Bloxham said although the figures do not provide an industry breakdown, they clearly show public sector job creation has been picking up, while private sector employment has been slowing down.
This, he said, is also consistent with the GDP growth figures, which showed that public demand was the key source of growth in the economy, while private demand has been weakening.
Ultimately, the chief economist said: “Still strong job creation, and an economy that is operating at near its full capacity are contributing to Australia’s sticky inflation challenge, and mean rate cuts are unlikely to be on the agenda for some time yet”.
Earlier this month, in response to the GDP report, CBA’s Gareth Aird noted that while the RBA has raised interest rates to a restrictive level to curb demand growth, “monetary policy cannot slow the public side of the economy”.
“The national accounts indicate that the level of interest rates has clearly worked to slow activity in the private economy,” he said.
“The consumer is feeling the brunt of the RBA’s tightening … Businesses, by extension, suffer as growth in overall sales to consumers slow. Investment plans have moderated in response.”
At the same time, the government sector continues to grow as a share of the economy.
“Indeed, the lift in public recurrent expenditure has been quite extraordinary over an extended period of time,” Aird said.
Despite ongoing warnings, Chalmers proudly touted Labor’s “record” job creation on Thursday, highlighting that the government has facilitated nearly 1 million jobs since taking office – marking the largest employment surge in a single parliamentary term in Australia’s history.
“This is a solid achievement in the context of a slowing economy and softer labour market,” Chalmers said without revealing the number of those 1 million jobs that were actually in the public sector.
As the debate continues, the only certainty is that the government’s ability to effectively manage the economy will be closely scrutinised in the months ahead.
