It’s been labelled everything from a neo-Marxist manifesto to the delusions of grandeur of a nerd who is out of touch with “ordinary Australians”, but Treasurer Jim Chalmers is not for turning.
A week after releasing a 6000-word essay on the issues facing the economy, both now and over the coming decades, the treasurer is unbowed in the face of fierce criticism from critics on the political right.
The criticism has stretched from Chalmers not focusing on the immediate troubles confronting the country to claims of shunning free markets to embrace a Soviet-like command-and-control economic model.
But in an exclusive interview, Chalmers rejects the suggestion that he’s some sort of revolutionary, mounting the ramparts like modern-day Les Misérables characters demanding an end to the existing economic order.
Chalmers describes the reaction to his essay in in some quarters as unhinged. But he says, outside of politics, those who have read his words have shown much more understanding.
“We knew there would be some reaction from the usual suspects, but it’s got a bit unhinged as it’s gone on,” he says. “But in the business sector or among the investment community, people were already thinking about these type of issues. The feedback from people who don’t have a partisan dog in the fight has been really encouraging.”
The title of Chalmers’ essay, , is a recognition of both the global economy’s struggles over the past 15 years and how the economic system will have to change if it is to continue delivering for Australians.
The crises referenced in the title are the Global Financial Crisis which, as of 2008, was the biggest hit to the world economy since the Great Depression. In its wake, governments were left with huge debts, central banks were forced to keep interest rates at record-low levels, and wages stagnated while productivity growth slowed to 50-year lows.
Then along came two more crises: the COVID-19 pandemic and the capacity-constraint/Ukraine war inflation rise that has now forced central banks to lift interest rates at a record pace.
The political reaction to the past 15 years manifested itself in the extraordinary rise of populism across the world as voters, left behind by economic failure, sought a remedy to their predicament.
Chalmers’ thesis is that, with economic challenges only growing, closer connections between government and the private sector should be developed to encourage investment in areas that deliver social and economic dividends.
The government is already moving in this direction. Last year, Chalmers met with big super funds and private investment groups about sinking more cash into social housing. This week, he talked to funds managing $20 trillion about financing more renewable energy.
Chalmers believes something has to change after a wasted decade. The 2020s, he says, will be a defining period for the political and economic system.
He cites the advent of mass clean energy, the development of critical minerals and new industries plus the advent of major advances in data and technology as factors that make the next decade vital to Australia and the world.
“These three big changes are under way. Getting on the right side of them is important for Australia’s economic and social future,” he says. “The old ideology hasn’t served us well.”
Those thinking the blowback in some quarters to the essay will stop Chalmers, whose doctoral thesis was on Paul Keating and the importance of leadership, will be disappointed.
The treasurer is tossing up which of two new books on the state of the global economy to read – either , by American economist Brad DeLong; or from associate editor Martin Wolf.
Unsurprisingly, both books touch on the troubles that have plagued the global economic and political systems: the failure of democracies to deal with the economic troubles that have developed over recent years and how this has given succour to populists and autocrats.
Chalmers also pushes back at those who think the essay diverted from his “day job” and the government’s focus on cost of living pressures.
“If someone thinks that writing this essay, after the kids had gone to bed while I was on my Christmas holiday, was getting in the way of everything else – well, that says more about them,” he says.
“I think it’s absolutely clear that the government’s overwhelming objective is to deal with inflation and cost of living.
“Dealing with inflation is the main objective of our economic plan and it’s going to be a major part of the [May] budget.”
While Chalmers has opened a debate about capitalism, he and other economic policymakers are dealing with immediate problems – the most pressing being the sharp lift in official interest rates to deal with soaring inflation.
Just this week, the central banks of the United States, Britain and the eurozone all lifted their key interest rates to deal with inflation pressures within their jurisdictions. The Reserve Bank of Australia is short-priced to follow suit when it meets for the first time this year on Tuesday.
The Reserve Bank has lifted interest rates at its past eight consecutive board meetings, taking the cash rate from a record low of 0.1 per cent to a 10-year high of 3.1 per cent. It’s already the most aggressive tightening of monetary policy in almost three decades.
After Tuesday’s meeting, the cash rate is likely to be at a fresh 10-year high of 3.35 per cent. Another quarter percentage point rate rise will flow quickly to the millions of households with variable mortgages.
But of growing concern are those with fixed mortgage rates.
The RBA reckons there are about 800,000 fixed-rate loans that roll off the ultra-low interest rates that were available in 2020 and 2021. In terms of households, it’s probably more than 600,000 who will see a sharp increase in their repayments over the coming 11 months.
Deutsche Bank Australia senior economist Phil O’Donaghoe caused a stir this week by arguing the RBA will push the cash rate to 4.1 per cent by August.
O’Donaghoe, who had believed the cash rate would peak at 3.35 per cent, said it appeared consumers had yet to curb their enthusiasm for retail therapy.
On a $750,000 mortgage, a cash rate of 4.1 per cent would mean monthly repayments rise by another $480. That would be on top of the cumulative $1300 in repayments caused by the rate rises between May and December.
Put it all together, and a $1780 a month increase in repayments – or $21,360 a year – is a large extra impost on a household.
Perversely, the sharp increase in interest rates is actually adding to inflation (as measured by the Australian Bureau of Statistics).
Outside its traditional measure of inflation, the bureau also tracks the inflation rates facing particular groups in the community. The spending patterns of age pensioners, working families, self-funded retirees and people on welfare are all subtly different, which means their inflation rates are different.
Working families traditionally hold mortgages. That means their cost of living is going up quite a bit faster than those without mortgages.
Over the past 12 months, the inflation rate for this part of the community is running at 9.3 per cent. By contrast, the inflation rate is 7.3 per cent for age pensioners.
The difference between the two groups is largely due to the soaring cost of mortgage interest which, according to the bureau, has jumped by an all-time high rate of 61.3 per cent over the past 12 months.
A key argument from the RBA and Treasury, often repeated over the past 18 months, is that Australians have run up more than $250 billion in extra savings through the pandemic. This cushion of cash is expected to help stretched home buyers absorb the increase in interest rates.
Research by UBS released this week highlights the fine line being walked by the Reserve Bank. UBS analysts dug into commercial bank deposits and, according to their work, by November last year savings were about $175 billion above what they would have been if not for the pandemic.
However, they worked out that almost all of that extra cash was saved by people over the age of 65. They had stuffed away $141 billion of that $175 billion; the next largest group with extra savings were those aged between 55 and 64, and those aged under 24.
Almost all of the extra cash saved up in Australia amid the pandemic belongs to people over the age of 65.
The problem, as identified by UBS, is that middle-aged households – the ones with families, the ones who are the economy’s most important consumers – have barely an extra dollar to show for all this increase in saving.
According to UBS, this large group of households is facing a “cash-flow crunch” that will be so significant that the Reserve Bank will start cutting interest rates in the final three months of this year.
“If the RBA hikes rates beyond 3.5 per cent, or does not cut in the fourth quarter of this year, then we see a material risk of a hard landing, driven by middle-aged households,” they found.
This week, the International Monetary Fund updated its own forecasts for the Australian economy. It expects it to expand by 1.6 per cent this year and then 1.7 per cent in 2024.
The fund does not expect a recession in Australia, while a 1.6 per cent GDP result would make Australia one of the fastest-growing economies in the developed world.
But once you add in population growth, that’s a per capita recession. It would be worse than the 2018-19 period, when per capita GDP flatlined and forced the RBA into cutting interest rates to get the economy and wages growing.
It’s a story of slow growth, high inflation, soaring interest rates and falling real wages for millions of ordinary people. That would be eerily similar to the past 15 years – the ones that prompted Jim Chalmers to pen his essay.
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