‘Too clever by half’ Treasurer tries to hack the CPI

Treasurer Jim Chalmers has delivered a budget shaped by the upcoming election and his leadership ambitions.

His politically-shaped budget attempts to hack the CPI through electricity rebates, and he has embraced the ‘mission economy’ — involving aggressive industrial policy in favour of privileged sectors.

While politically savvy, the budget makes little economic sense and is not in the long-term interests of Australians.

On the plus side, the government seems to clearly recognise the severity of the housing crisis and the need to build more housing, even if policy relies on state governments doing more. But this one good approach is far outweighed by the bad ones.

Amidst the buzz surrounding the 2023-24 surplus, it is crucial to note that the government is estimating a 1 percent of GDP deficit in 2024-25; the financial year the budget is for.

This deficit, amounting to over $28 billion ($28,000 million), translates to a willingness to borrow and spend more than $1,500 per Australian voter to secure an election victory.

Treasury’s estimates of the cyclical and structural components of the budget balance tell us the surplus should have been twice as large in 2023-24, and the budget should be roughly in balance, with a slim surplus in 2024-25.

Instead, it is increasing spending. In net terms, the 2024-25 budget has suffered from an additional $9.5 billion of policy spend, in net terms, since the MYEFO update last December, including a big, poorly-targeted cost-of-living package.

Of course, for the government, it is the politics that matter; rather than the economics or equity of the package.

Spending is rising, and the government does not have a plan to fix the structural deficit. Cost blowouts offset the savings it found for the NDIS. The scheme has been growing at around 20 percent annually, but the government plans to reduce that growth to the still-high rate of 8 percent. We live in hope.

The government simply appears incapable of managing spending. In Chalmers’ first budget in October 2022, Treasury estimated real growth of budget payments at -1 percent in 2023-24 (i.e. Treasury expected them to fall) and 1.8 percent in 2024-25. In the current budget, those figures have become 4.5 and 3.6 percent, respectively.

Payments in 2024-25 are $33 billion higher than the projection for 2024-25 in Chalmers’ first budget, more than accounting for the deficit in 2024-25. This massive revision of spending estimates has happened in just over 18 months. And the extra billions in off-budget spending are in addition to this figuring. These outcomes make a mockery of the projected slowdown in spending growth after 2024-25. It likely will not happen, and the government’s track record suggests they are incapable of making it happen. There will likely be more spending and bigger deficits.

Chalmers’ attempt to manipulate the CPI by directly reducing consumer electricity bills may seem clever, but it fails to address the underlying inflationary pressures. It could exacerbate these pressures by easing household budget constraints.

For instance, combining the federal subsidy with the recently announced Queensland government subsidy of $1,000, some households in Queensland may not have to pay for electricity for the next nine months, potentially fueling inflation.

The best that can be said for the measure is that the government and RBA are worried that sustained above-target inflation will feed into wage claims and inflation expectations.

The government may argue the cost-of-living subsidies reduce that risk and hence the need for tighter monetary policy. But the Treasurer has failed to convince many economists that spending more money can bring down inflation.

Chalmers is being too clever by half, and there’s a real risk his election strategy will be derailed by the RBA holding rates steady or, worst case, increasing one more time — which is no longer unthinkable.

Michelle Bullock has said the RBA Board “is not ruling anything in or out”.  They are clever enough to see through Chalmers’ CPI hack and should not be impressed.

An odd aspect of the cost-of-living package is that it contradicts the government’s greenhouse emission goals. Subsidising electricity makes little sense for a government committed to net zero emissions, given around two-thirds of our electricity comes from non-renewables.

The cost-of-living package is foolhardy. It is a populist package, the type done by populist developing-economy politicians.

In IMF reviews of developing economies, you often see criticisms of energy subsidies. Is that the future for Australia?

Repeated subsidies for electricity consumption will become politically difficult to stop and risk becoming an entrenched new entitlement program.

The other defining feature of the budget is the embrace of what prominent economist Mariana Mazzucato calls the ‘mission economy’: the government sets the mission for an economy and develops policies that guide the economy in achieving that mission.

Our government sees its mission as shepherding Australia towards net zero emissions, guided by activist industrial policy favouring critical minerals processing and green hydrogen production.

It is picking winners and showering billions of dollars of tax credits on the lucky recipients, which will likely include some prominent billionaires.

It is not precisely Soviet-style central planning but is a return to the era of highly interventionist democratic governments of the post-war period.

It rejects the Hawke-Keating legacy of ending post-war protectionism and deregulating large parts of the economy.

Hawke and Keating’s courageous embrace of market economics in the 1980s — supported by Opposition members, and John Howard in particular — set Australia up for one of its best-ever periods of economic performance following the early 1990s recession.

From the bottom third of the OECD, we recovered to the top third by the mid-2000s; mainly through better policy settings.

Globally, the greater embrace of free markets has seen an enormous reduction in extreme poverty–over one billion people since 1990.

Activist industrial policy is never part of a recipe for economic success.

Previous activist industrial policy has given us numerous failures, including a domestic car industry that ultimately was unviable despite decades of tariff protection and billions of assistance.

Internationally, there are multiple examples, including the British-French Concorde supersonic aeroplane. With his embrace of activist industrial policy, Chalmers is ignoring history lessons, both here and overseas.

Gene Tunny is an Adjunct Fellow in Economics at the Centre for Independent Studies.

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