Labor’sthumping electoral victoryhas cleared the way for Jim Chalmers to pursue his grand vision: a greener and more dynamic economy, match-fit for a transformed world over the coming decade.
Freed from the biggest inflationary shock in a generation, the national mood has shifted to the future, and the shackles binding the treasurer’s hands through the first term have been broken.
Inflation, which was such a binding constraint in Labor’s first three budgets, is back within the Reserve Bank of Australia’s 2-3% target range and a world away from the peak of nearly 8% peak at the end of 2022.
Cost-of-living pressures remain, but are easing as real wages rise andinterest rates fall, while the jobs market has stayed strong.
The CBA’s chief economist, Luke Yeaman, says the much-improved economic circumstances have created “a very strong foundation for the government to build on leading into this term”.
“No doubt that one of the reasons inflation is so challenging for governments is that when you try to invest, you risk stoking inflation. There’s not anything like the concern there was previously, and that does give the government a little more freedom to invest,” he says.
Yeaman, who served as Treasury deputy secretary between May 2020 and March of this year, says: “If you don’t look at the international factors, the economy is actually faring very well after a very tough few years.
“But managing the trade war and the more contested global economy will be a very significant challenge. Australia is fairly well placed to weather that storm, but the government and Reserve Bank will want to wait and see how it plays out over the next few months.”
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Pradeep Philip, a lead partner at Deloitte Access Economics, agrees the economy has “turned the corner”.
Growth may be “still stuck in second gear”, Philip says, but it’s a good outcome and not one that was guaranteed when the RBA first began hiking rates three years ago.
“This tells us they [the RBA] have managed to bring inflation down while keeping unemployment from going up, as it has done in the past,” he says.
Philip says the priority for a second Labor term “is moving from managing the economic cycle to driving structural reform, because productivity requires that structural reform”.
“The building blocks of this medium-term strategy have already been laid out,” he says, “industrial resilience, the energy transition, and having important conversations about security and defence.”
Labor’s heavily interventionist strategy to seize on these opportunities and confront long-term challenges including lowering emissions is part of a global trend, but it comes with big risks.
Plans such as theFuture Made in Australia programmay be justified, but the potential for waste and inefficiency is significant, the Productivity Commission (PC) has warned, especially if decisions are captive to politics or lobby groups.
Economists cheered when Chalmers at the weekend declared the Albanese government’s “first term was primarily inflation without forgetting productivity [while] the second term will be primarily productivity without forgetting inflation”.
Productivity growth is the key driver of higher living standards over time, and productivity is no higher today than five years ago. Australia is barely more productive than we were a decade earlier, which means all income gains have come via perspiration rather than inspiration.
Or, as the PC economist Jeremy Kamil has put it: “Working harder just to make ends meet is not anyone’s idea of prosperity.”
One of Australia’s leading labour market economists, the University of Melbourne’s Prof Jeff Borland, says Australia’s future depends on capitalising on “two big comparative advantages”: natural resources and a highly educated workforce.
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“We need to make the most of that highly skilled workforce by doing everything we can to diffuse these new technologies such as AI,” Borland says.
Chalmers has commissioned the PC to deliver a series of practical reform measures aimed at creating a more skilled workforce, harnessing data and digital technology, delivering care more efficiently, the net zero transformation and creating a more dynamic and resilient economy.
The so-called “five pillars” inquiries will deliver a practical roadmap for reform for Labor’s second term, with the interim reports due out in July and August.
“I’m looking forward to receiving that because we’ve got an agenda on productivity, but we can do more, and we will do more,” Chalmers said at the weekend.
Some experts have criticised Chalmers’ unwillingness to pursue big bang reforms, most notably in the tax system, where he famously described the approach to reform as taking “bite-sized chunks”.
Anthony Albanese this week played down suggestions his government would surprise the country with major new policies, even as he pushed back against any suggestion Labor lacked ambition.
“We’re not getting carried away,” he said.
Still, the chief economist at Challenger, Jonathan Kearns, is hopeful Labor’s public mandate and bolstered numbers in the Senate “gives them the confidence and ability to take a stronger economic agenda” to the nation.
Saturday’s convincing win makes a third term “very likely”, Kearns, a former top economist at the RBA, suggests. “In that way they should have a greater confidence to implement real reform that is perhaps less popular in the short term.”
“The big priorities are the budget and productivity,” he adds.
Indeed, even as easing inflationary pressures widen the scope for policymakers, budgetary pressures are pushing the other way.
The March budget showed a sea of red over the coming decade, accompanied with rising debt levels. And S&P Global Ratings recently warned that the country’s treasured AAA debt rating is at risk if federal and state governments don’t take action to improve their fiscal positions, a warningAlbanese mockingly dismissed.
Yeaman predicts the structural budget deficit “will remain a big focus and challenge” through Labor’s next term.
“The government should not anticipate in this term the same large upgrades to revenue they saw over the last term. And they continue to face substantial spending pressures in the NDIS, aged care and health, and those budget pressures remain,” he says.
Patrick Commins is Guardian Australia’s economics editor