Luke Yeaman:
Well, welcome everyone to a very special episode of the CommBank View: Economics and Markets podcast. I am Luke Yeaman, the chief economist of CommBank, and I am joined by a very special guest today in his sunny home state of Queensland no less, the Treasurer of Australia, Dr Jim Chalmers. Welcome.
Jim Chalmers:
Nice to see you again, Luke. Thanks for the opportunity to have a chat.
Yeaman:
Great to have you here. There’s a huge amount we want to cover in a short amount of time today. We’ve got big issues in the world. We’ve got the breakdown of the global rules‑based order. We’ve got the Iran conflict. We’ve got inflation, AI. And of course, the Budget which you’ll be handing down in just about 2 weeks’ time.
But first, I wanted to ask you just to step back and take a bigger picture view. Every day, you’re making important decisions that shape the future of the country, the future of the economy. So, for our listeners, what would you say – a nice easy question to start – what would you say is the underlying economic philosophy that guides you in making those decisions? What do you want to see for the Australian economy going forward?
Chalmers:
Well, for me, if you think about the more than 2 decades now that I’ve been working in and around this portfolio – that period of really quite intense upheaval, those 5 big economic shocks in 2 decades – really the thing that I have learned is to take a longer term view, to try and impose some direction on the disruption. For me, what that means is making sure that all of this churn and change that we’re seeing in the global economy and in our society, to try and make sure that people are beneficiaries of that change, rather than victims of that change. If I’ve got one overriding approach, it’s really to try and make all of this change, which is accelerating, to make it work for people rather than against people.
If you think about how that plays out, if you think about this oversimplification of Australia’s economic history since Federation, we’re trying to build our fourth economy now. The first one, colonial; second one, increasingly industrial; the third one, increasingly global and financial and services based. What we’re trying to do now is to build the fourth economy. So, the thing that occupies most of my time and most of my thinking in trying to work out how we make people beneficiaries of change is how we build that fourth economy. The fourth economy will be powered by cleaner and cheaper energy. It will be transformed by technology. And if we get it right, it will be defined by social mobility. Social mobility is really the thing that got me here in the first place.
Yeaman:
Yeah. It’s really interesting, and I know you’ve spoken about this in the past. We’ve certainly argued at CBA, and I’ve argued, that we are in a new economic era fundamentally different to the one we’ve seen before. You talk about the fourth economy and churn and change. So you’ve talked about some of the opportunities there that are in that for Australia. You’ve talked about the climate change, net‑zero transition and so on. What worries you? You said, ‘if we get it right,’ what’s the thing that if we get it wrong will really bite for Australia? What could we get wrong in this transition?
Chalmers:
Well, I think if all of this change that’s being imposed on us and even the change that we create for ourselves, if that creates new divisions in our economy, but more importantly in our society, then we will have got it wrong. And there’s a real risk of that. I mean, you’ve spent a lot of time thinking about the world, Luke, and you know how some of these economic issues are spilling out into division and divisiveness around the world and we need to avoid that at all costs.
That’s why we see those things as interconnected. And if we get it wrong, if we just create new divisions in our society, economic or social, then we wouldn’t have got it quite right. The thing that worries me, the thing that keeps me up at night, is we’re dealing with 3 sets of pressures all at once, effectively. We’ve got the usual cyclical pressures in the economy at the same time as we’ve got these rolling shocks. You and I probably both used to think about, you know, shocks used to punctuate long periods of calm.
Yeaman:
Once a decade, once a decade rather than once every few years.
Chalmers:
Exactly right. And now these periods of calm punctuate long periods of shocks.
Yeaman:
And that’s going to continue, right? That’s going to be the future we’re in for least the next decade, you’d imagine.
Chalmers:
Absolutely, it’s the normal now. That’s the second set of pressures. Then we’ve got it against the backdrop of these big megatrends. I mentioned energy and technology, but the changing composition of our industrial base, the fragmentation of our geopolitics, a lot of the things that Prime Minister Carney spoke about in that very impactful speech at Davos.
So those 3 things all at once – the cyclical, the rolling shocks, and then these big structural issues at once – that’s why economic policy is so important, because we’re dealing with those 3 sets of issues all at once.
Yeaman:
Yeah, I strongly agree there. You mentioned Mark Carney, the Prime Minister of Canada, who I know you talk with and work closely with your Canadian colleagues, and have always had a good relationship there. I think in terms of Australia’s place in this new world, he’s thrown out a pretty stark challenge to countries like Australia, to middle powers to say, step up, step in, coordinate more, help shape those new rules that we’re going to see and put some constraints around some of the major powers like China and the US to actually step up and step into that space.
Do you buy into that view and do you think Australia is doing enough in that space so far? Because, again, to share a personal view, I always think Australia as one of the 15 biggest countries in the world with huge resources.
We’ve probably always been a bit humble and a bit unassuming in this space. So, is now the time for Australia to step up and take a bigger role in the global stage?
Chalmers:
Well, I think that humility is in lots of ways how we think of ourselves. That’s not always a bad thing to approach these big challenges with a degree of humility, but we do sometimes undersell ourselves in the world. I didn’t see Prime Minister Carney’s speech primarily, as some others did, as necessarily just a big shot at the Americans. I saw it as, really, a very welcome burst off candour about how the world is changing.
For Australia, we’re so trade exposed. We’ve got so much skin in the game. We’ve been the primary beneficiaries of that long period of calm that preceded these long periods of shocks. So, for us, we play the cards we’re dealt in the world to some extent when it comes to the biggest players in the global economy, but we bring a lot to the table as well. I think we’re getting better and better at leveraging our strengths, our economic strengths in particular. But also our ability to get –
Yeaman:
Is there one of those you’d highlight in particular? What do you see as Australia’s key comparative advantage? You talked a bit about some of the opportunities, but what’s Australia’s key comparative advantage now in this new era?
Chalmers:
Well, the easiest one to understand I think is critical minerals, and I know you’ve worked in this space before. We go to the world with these huge advantages when it comes to critical minerals and trying to value‑add to that. But don’t forget as well that we have, in the macro sense, we have some big advantages.
Our economy is better placed and better prepared for a lot of these shocks than most other economies, and our budget is stronger too. When I knew I was going to be speaking with you, Luke, I dug out some of these comparisons that we’ve talked about before. We’ve got 1 of the 3 strongest budgets in the G20. In the OECD, we’ve got the 11th lowest tax‑to‑GDP and the sixth lowest spending‑to‑GDP. We’ve got lower gross debt‑to‑GDP than any major advanced economy, and so we’ve got a lot of advantages and we’ve got a huge opportunity here. We don’t want the world to fragment along the lines that Prime Minister Carney and others have spoken about, but our imperative is to make the most of a bad situation and that’s what we intend to do.
Yeaman:
Yeah. We’re certainly seeing at CommBank, in terms of our investors that we deal with around the world, there’s a lot of interest in Australia at the moment given people are looking at where the marginal dollar flows as they look to move a little bit less heavy into the US and look for other alternatives around the world. They’re seeing Australia as an attractive option for investment.
Before we move off the international and come back to some more current issues, I just wanted to ask, relationships matter in this new era, particularly with the big players. We’ve seen some swings and roundabouts in our relationship with China. In a few words, how would you describe the Australian relationship with China now and over the next few years?
Chalmers:
Stabilised. There was a period there where the relationship was not the best version of itself, and we’ve put a lot of effort into it. I pay tribute to the PM and Ministers Wong and Farrell and Marles and others for putting a lot of work into stabilising that relationship. Because it’s possible, in the way we engage in the world on economic issues or indeed national security issues, to recognise where our differences lie. They’re often genuine, sometimes they are substantial. But our job leading a good country like ours is to make sure that we engage in our national interest, we do the best we can, and I think the last few years has been a story of stabilisation, particularly when it comes to that key economic relationship with China.
Yeaman:
And the US? Has some damage been done to that relationship?
Chalmers:
The relationship is very strong with the Americans. I engage regularly with Scott Bessent. The PM has had a number of, I think, really successful engagements with President Trump, and other ministers as well. So, obviously there’s a lot of disruption in the world. There’s an element of unpredictability, some of that is policy unpredictability. Some of that we’re seeing play out right now in very consequential ways. But overall, I think our relationships in the world are good and that’s because we put a lot of effort into them.
Yeaman:
Great. So, I want to then swing to some more current issues and obviously the one that’s front and centre of everybody’s mind is the conflict in Iran, and what it does to global energy markets and what it does for Australia. I mean, we’ve certainly written at CBA that, and it’s widely accepted that, the economic outlook from here hinges primarily on whether the Strait of Hormuz reopens in the short term, the medium term or the longer term and how close we are to that.
No one knows for sure what’s going to happen next, but you’re privy to a lot of information that others aren’t. I mean, at this stage, in broad terms, are you feeling optimistic that we’ll see the Strait reopen in the next 4 to 6 weeks, or are you preparing to dig in for a longer event here?
Chalmers:
Well, I read a lot of the analysis that comes out of the private sector, including the work that’s generated by your team at CBA. I think it reflects the view that a lot of people have, including the government, which is that it is impossible to predict with any precision exactly the moment when the war will end in an enduring way and the Strait will open properly. There’s been some false starts. There’ve been some false dawns. I was in DC when the declaration was made that the Strait was open, it was a Friday at the end of a week when I was in DC, and by the time I landed back in Brisbane, the Strait was closed again. So, that’s just a sense of the unpredictability.
I don’t think anyone knows when it will properly end, but what we are sure of and what makes me quite concerned, if I’m honest, is the end of the war, the reopening of the Strait, won’t mean this kind of instantaneous normalisation of the global economy. If you think about all the issues that are still to play out – sea mines in the Strait, insurance costs in the Strait, lasting damage done to oil and gas infrastructure in the Middle East more broadly, damage to supply chains, lags in supply chains. So, we don’t know if the oil shock itself is near term or longer term, but we do know that there will be longer term costs and consequences, and I think they’ll play out for some time.
Yeaman:
When you say longer term, are you talking 3 months, 6 months, 12 months, 3 years? I mean, some of the damage to infrastructure and gas in particular in the gulf, they’re talking 2 to 5 years for that to free up. I think oil looks a little more promising, but when you say that to the Australian community, what do you have in mind?
Chalmers:
Well, we run multiple scenarios, and the variables in those scenarios that we get our friends in Treasury to run are basically: when does the war end, when does the Strait reopen properly, and how long does it take for this stuff to get back online? It won’t surprise you with your experience to know that some of those scenarios have 3 or 6 month horizons, and some of them have much longer horizons lasting beyond the next 12 months or so. It’s not a cop‑out to say there’s a lot of uncertainty then, that’s just the fact of that.
In our central case, we’ve still got some consequences playing out for some time and that reflects the fact that things won’t bounce back to normal immediately, and that’s even if you assume that there is something like normal for it to bounce back to. But what we’ve learned in the last couple of decades is often one shock gives rise to another.
Yeaman:
To drill down a bit further, there’s the Strait itself, but there’s also Australia’s fuel suppliers. I think one of the biggest impacts on consumer confidence and business confidence is the fear of not knowing if there’ll be fuel coming in the door or not. In the early days of the crisis, I think there was a bit more of concern around that. Things have stabilised, the government’s done a lot of work, I know, to get more fuel in the door. But I mean, at this stage, how do you see that fuel outlook? Because that’s one of the things that would, I imagine, push us into some more severe scenarios if we had to see restrictions.
Chalmers:
It’s kind of you to reference the work that the government’s doing because every day, most of every day, is about chasing barrels on global markets. Ministers Bowen and King and Farrell and Wong and Albo, everyone, it’s all hands on deck trying to get more fuel. So, I appreciate you recognising that effort.
We’ve got more petrol now than we had at the start of the war, and we’ve got about the same diesel and about the same jet fuel, but that’s only because of a lot of effort, private sector effort and government effort. We can’t be complacent about that, because the outlook even on that front is uncertain. But what we’ve tried to do is try to keep the place moving.
We’re in stage 2 of a 4 stage set of contingencies. We’d rather not go to 3 or 4. We don’t know how this will play out, but we’re in a better position, I think, than a lot of people might have anticipated. That’s because the ships are arriving, we’re getting this uncontracted fuel on global markets.
Export Finance Australia is doing a wonderful job securing some of those deals. We’re engaging with the Singaporeans, the South Koreans and others. As I said, it’s all hands on deck, and that’s having a positive impact on our supply. We’re not complacent about that, but we do have a degree of confidence about what the next few weeks, and ideally longer than that looks like.
Yeaman:
It’s a sort of ‘stay alert but not alarmed’ message, it sounds like from that side. Starting to pivot towards the Budget a little, which is obviously a very significant budget for you. Just on this particular topic, are we going to see – it’s been widely commented that Australia started this crisis with probably not the same level of fuel stocks that other countries did. That’s been a long‑term position in Australia across both sides of politics. We haven’t invested in those larger storages. Will that be fixed in the Budget?
Chalmers:
I’m not sure about fixed entirely, but certainly a lot of the late work that’s happening on the Budget is to get into some of these issues and some of these challenges. That won’t surprise you. We recalibrate the budget depending on the economic circumstances and this is the biggest influence in the near term, so we’re putting a lot of thinking and a lot of work into that.
We probably did come into this a little bit more vulnerable than we would have hoped. It’s not a partisan thing to say that we had 6 refineries under the former government, we ended up with 2 by the end of their term in office. We were storing our fallback supplies in Texas. All of that made us a bit less secure, a bit less resilient and a bit more vulnerable.
We’ve done what we can in the near term in ways that we just talked about. If there are longer term ways that we can consider some of these questions, of course, that’ll be a key part of our thinking in the last few days before we put the Budget to bed and hit print.
Yeaman:
So, to dig into the Budget a bit more then. This is, I think, your sixth budget you’re delivering and seems from the outside like it’s going to be one of the most important, but also most interesting. There’s certainly been a lot of changes of tack. I mean, I imagine when you first started thinking about the Budget after the election, it was obviously quite a big focus on reform and productivity.
And was this the time to seize some tax reform and do some other big, changes in that space? Then we saw inflation start to break out again after looking in a good place in middle of last year, it started to become a problem again and the Reserve Bank delivered back‑to‑back rate hikes.
Now you’ve got a war. Is it a crisis budget? Is it a reform budget? Is it an inflation fighting budget? How are you juggling? I imagine there’s been a lot of changes of tack. How are you juggling that?
Chalmers:
I mean, this is really the key question. Over, really since the election, certainly into the reform roundtable and then over summer, we sketched out a budget that looks a little bit different to where we will land in the second week of May. A lot of work on budgets goes in over the summer and a lot of time on the back deck, literally sketching out what a budget might look like on those treasurer notepads.
Yeaman:
And a few versions of the Budget speech, I imagine.
Chalmers:
A few different versions, yes. If you think about it, this war began on the last day of summer. So, ordinarily budgets are sketched out in summer, locked down in autumn. This one is being recalibrated even in autumn, and that’s different to normal. But there are some common elements. A lot of the things talked about at the reform roundtable will be familiar to people when they see the Budget. That’s because I reject this idea that it’s a tug of war between resilience and reform. I think reform is resilience.
Yeaman:
So, you think you can do both?
Chalmers:
I think I can do both and we can do both. Yes, there are near term efforts, yes, there are longer term reforms, but they’re both urgent. They’re both actually urgent. I thought what Danielle Wood said in the last day or 2, Danielle Wood from the PC said, a strong competitive economy is the ultimate source of economic resilience. She said any productivity package in the Budget is also a resilience package and that’s really how we’ve come at it.
So, of course, it’s not the same budget that we sketched out on the back deck over summer, but it has some common features and there will be reform. There’ll be a big emphasis on productivity. There will be savings. It might not be exactly the same savings, might not be exactly the same magnitude of savings, but people will recognise some of the themes of the of the reform roundtable in that period before the war escalated.
The other thing you raised, I know you want to get onto other questions, but the other thing you raised which is really important is even before the war, we learned about our economy towards the end of last year. We had this big bounce back in private sector activity, dwelling investment, business investment came back in ways that were –
Yeaman:
Much faster than we all expected.
Chalmers:
Much faster, and that put pressure on inflation. We learned from that that the speed limit in our economy was too low. So, even as we deal with these near‑term pressures, even if we consider issues around resilience, we need to remember that our overarching goal here is to lift the speed limit on the economy so we can grow more quickly with lower inflation. We haven’t parked that goal. It’s really a central consideration of the Budget at the same time as we do some of these other near‑term measures, but all of it is urgent.
Yeaman:
It sounds like it’s all 3. It’s a reform budget, it’s an inflation fighting budget, you’ve got all the things coming together under resilience budget. So, I’m sure a lot of people will be happy to hear that and we’ll look forward to seeing it on the night. I do want to come to inflation, but before we do, just to dig into the Budget a little more.
One thing we’ve seen is a bit of commentary suggesting that because of this global energy shock, Australia is going to see a windfall to the Budget. Certainly, during the Ukraine war, when it first broke out, there was a substantial lift in energy prices, commodity prices. It wasn’t the main reason or the only reason, but it was certainly a factor in delivering 2 surpluses. What are you hearing and what’s your expectation now? Are we going to see a substantial uplift to the budget from this crisis, or is that not the case this time around?
Chalmers:
I think there’ll be consequences in both directions. First of all, any upgrade in any year will be a fraction of what you’ve seen speculated about. I sometimes read these stories, even very good, well‑informed people, and I read it and I think I wish we were getting that kind of bump.
Yeaman:
I should say for the record, we haven’t predicted that. I think we haven’t seen the same degree of jumping in iron ore prices, for example, or coal prices.
Chalmers:
Some of your counterparts, yes. I should be fair to you about that too, but the reason I make that point is because not everybody understands that in times of big upheavals like this, in this case an oil shock, the pressures are in both ways. People often count the upside and not the downside. It’s easy to understand that what’s happening around the world will put downward pressure on growth in our economy. It’s easy to imagine that it will run the risk of slightly higher unemployment. Those things have consequences for budgets too. But the one that’s often missed, which wouldn’t be missed by you or your colleagues, is the exchange rate is higher.
Currently, we haven’t finished these numbers yet or these forecasts, we haven’t hit stop on any of that yet down in the Treasury building. But my current expectation is that some years will be worse, will be downgraded, and some years might be very slightly upgraded, but to nowhere near –
Yeaman:
In terms of revenue or in terms of the overall fiscal position?
Chalmers:
In terms of revenue. It’ll go in both directions depending on the year, but nobody should anticipate a big upward revision to revenue.
Yeaman:
That’s really interesting. On the spending side, the government’s recently announced some fairly big changes to the NDIS. I think, generally speaking, the community would agree that the Scheme needs support, but also needs to be sustainable. They are very large changes and they’ll have a big impact on your budget outlook.
The question I really wanted to ask is this scheme has had huge momentum. It was growing at 20 per cent year on year, then it came down to more like 10 to 12 per cent year on year. You’ve been targeting 8. Minister Butler said that hasn’t been achieved yet. There was hope of getting down to 5 or 6. Now you’re saying, I think the number is 2 per cent on average over the next 4 years.
So, I applaud that and think that’s needed, but how easy is it going to be to get those savings? Because I have to confess, I think that’s an optimistic and pretty ambitious target. So, how confident are you that that can be fully delivered with the help of the states and the community?
Chalmers:
Yeah, I think it can be done. It won’t be easy but it’s essential. We have to save the NDIS from itself. There’s an urgency to getting it back on track so that it can deliver for people that it is designed to support and to serve. I remember not that long ago on a Friday afternoon in the Treasury building, when we brought together all those market economists, including yourself, this was one of the key things that people were raising, because you can see that it’s a big pressure on the Budget.
The work that Mark Butler and Jenny McAllister and Katy Gallagher and the Expenditure Review Committee and others have done on this is really important. We do it as supporters of the NDIS. We’ve got to get the costs under control. And if you take a little step back from that and think about all the spending pressures in our budget right now – the NDIS, that’s the biggest saving in the budget that we’ll hand down. But we’ve also done work on aged care. We’ve also got some of the cost of servicing debt down as well.
You mentioned those percentages. The NDIS was growing at 22 per cent when we showed up, we got it down near 10, it will be it will reset itself over the course of the next few years and settle around 5 per cent. So, still growing, but growing in a more sustainable way. I think aged care was growing more than 6 per cent, we got it down to about 5. Debt interest costs were growing about 14 per cent, we got it down to about 10 per cent. So, you can see these structural issues in our budget being addressed.
It’s not easy and still a lot of pressure is going the other way. The hospitals deal, the cost of the aging of our population, all of those sorts of things. But we’ve made good progress here and that’s why I think the NDIS reforms are so important. They will be extremely difficult to land. But we can’t leave it to the next generation to fix what is so obviously a big challenge in our budget if it’s left unresolved and we don’t want it to get so bad down the track that somebody is tempted to not provide support to some who desperately need it in our communities.
Yeaman:
I strongly agree with that. We all have people that we know in our lives who’ve been taking benefits from the NDIS and have seen their life transformed. So, I think we all want to see that continue. But would you acknowledge that by putting in these cuts into the budget bottom line, even if you make substantial cuts and get growth down to 3 or 4 or 5 per cent which would still be a big step up, that does expose the budget to a little bit of upside risk down the track?
Chalmers:
There are risks in both directions. I don’t want to pretend otherwise. We are conservative with some of our forecasts, deliberately for this reason. In this case, we’ve got a lot of work to do to make sure that we get it back onto a sustainable footing. I don’t dismiss or deny that, I think we can do it. But in every budget there are risks in both directions and that’s one of them.
Yeaman:
Yeah, of course. The other big budget speculation is around negative gearing and capital gains tax and taxation of housing. I know you’re not going to tell me what’s in the Budget here. There’s been quite a bit of media speculation saying that the government will look to return to an indexation model for CGT. The pre‑99 model that existed for all asset classes seems to be the current discussion out there instead of the 50 per cent discounts, and abolishing negative gearing altogether. I know you won’t tell me, but is that close to the mark? Is that heading in the right direction?
Chalmer:
Well, you’re right that we will talk more about tax reform on Budget night.
Yeaman:
You can’t blame me for trying.
Chalmers:
You’re not the first and won’t be the last in the course of the fortnight before the Budget. There’s obviously a lot of speculation. The things I would say about the speculation that you’ve seen, first of all, without signing up to a particular model or to any part of this speculation, that we’ve made it really clear for some time now that we think that there are intergenerational issues in the tax system and in the housing market.
We’re working through ways to try and address that. We’ve already been cutting taxes, we’ve changed the superannuation arrangements, investing in a lot more supply and housing, but there’s more work to do there. So, we’re working through and finalising some decisions in that regard.
I think, a bit like what you said about revenue upgrades a moment ago, one of the things that I think is not well understood in the speculation is that even if we went down the path that has been speculated about in those areas that you’ve asked me about, people shouldn’t expect there to be this huge amount of new revenue show up over the course of the next few years in the budget. That’s because most people, when they think through these sorts of issues, they think about transitional issues and the like.
There is a welcome debate out there about the role of tax reform in trying to rebalance this issue we’ve got between very generous treatment of assets and less generous treatment of labour income of workers. We have done a bunch in that regard already in tax cuts, in standard deduction and super and all of those sorts of things.
But people assume that all of a sudden, a huge amount of revenue will show up that you can automatically and immediately give away, and most people who think deeply about those tax changes that you have asked me about would understand that there wouldn’t be a heap of revenue.
Yeaman:
I think we see that, and I think also if we potentially are in a higher inflationary environment, generally now with indexation, that affects some of the numbers I presume as well. Grandfathering is the other issue on people’s minds with these long‑lived investments, whether it’s superannuation, changes to housing taxation. In general, do think people have a reasonable expectation that their existing investments will be protected or is that something that comes at a cost of revenue, obviously, so you’ve got to make these trade‑offs?
Chalmers:
Without getting into hypotheticals about policies, what you try and do is to make sure that we recognise the decisions that people have taken in the past. But again, people shouldn’t read too much into that. Whenever anyone is thinking about these sorts of issues, some of these big tax reforms that have been speculated about, obviously people work through or think through some of those transitional matters.
Yeaman:
I guess we’ll find out more on Budget night in a couple of weeks’ time. Before we finish, I’ve got a couple more questions on inflation and then one on AI, but before we get to that. On house prices, you talk about intergenerational equity and there’s clearly going to be some changes in the Budget in this area. There’s been quite a lot of work done, and we’ve done it ourselves and others have done it. The Treasury’s talked about this, Grattan Institute, others.
Generally speaking, when people look at these sort of changes, they don’t see a big movement in house prices. We estimated maybe one to 3 per cent lower overall. It does bring a bit of downward pressure on prices, but not to the same degree supply does. I mean, in general, do you accept that as a proposition that these sort of changes to tax arrangements are going to make a difference, but a relatively small difference, or do you have a different view?
Chalmers:
Well, we’re not targeting a certain outcome on price. We’re not trying to target a certain change necessarily in price. We care about there being affordable options for people. Really, primarily, we’re focused on supply. The biggest challenge in the housing market is we don’t have enough homes, but we’re also focused on the composition of the home ownership base.
I think anyone who looks objectively at the way that home ownership rates have declined over time and proportionately as well, homeowners and owner‑occupiers versus investors, there’s been a long‑term trend. I think that even if you just go back to around the turn of the century, those changes that were made to capital gains, you can see that that’s had an impact in the composition of the housing market.
Supply is the main game, but I think closely related is the composition of owner‑occupiers and we’ve seen that decline over time. When we talk about intergenerational issues – again without pre‑empting the finalisation of the Budget – when we talk about intergenerational issues, the intersection between tax and housing, the composition of the housing market is not something that anyone should ignore.
Yeaman:
That’s a really interesting point. To then bring it back to inflation, which we discussed a little earlier, and link to the Budget. So, we got an inflation read just recently, trimmed mean inflation at 0.8 per cent for the quarter which is a little better than some had expected.
But still, there’s still an inflation challenge there in the system. I assume the Reserve Bank Governor, Michele Bullock, will be watching the Budget very closely as well and looking to see what you do and which levers you pull. You’re obviously pursuing some pretty significant savings around the NDIS and there’ll be some revenue I presume from housing tax changes, although as you say, maybe not a big windfall.
The big question will be how much of that’s going to get saved and how much of that’s going to get spent. Will we see a material improvement in the fiscal position in the short term, medium term, as a result of some of these savings, or are the spending pressures so much that you’re going to see some of that taken away?
Chalmers:
First of all, genuinely, the numbers haven’t settled yet but there are a lot of pressures running in the other direction. Even with very substantial savings like the NDIS package, can see that coming the other way, a $25 billion hospitals deal, for example, a whole bunch of estimates variations. I think the idea that one budget can solve all of these structural issues in the budget, I don’t think people should expect that. You can’t just flick 2 or 3 switches and all of a sudden, the budget’s in this structurally perfect position. Reform and budget repair is direction, not a destination, so I think that’s an important thing to remember.
Now, when it comes to the Reserve Bank, I’ve been speaking to Governor Bullock regularly, as you would anticipate, and the Secretary of the Treasury has as well. We try and keep Governor Bullock abreast of our considerations. I’ve had a couple of conversations with her in the last week or week and a bit, and as we’re making these decisions, we brief her on them. So, when the Budget comes out on the second week of May, it won’t be a surprise to her. In fact, I’m pretty sure in all of the budgets I’ve handed down, this will be number 5, I’m pretty sure I’ve briefed Governor Lowe or Governor Bullock in advance on every occasion and that’s what we’ll do this time too.
Yeaman:
Just last on inflation, taking a slightly longer‑term view, the stagflation word has come up a lot in the last few weeks and months, a lot of talk about the seventies, and I think there are some comparison points but some differences as well. I know that senior members of the RBA, Deputy Governor Hauser, Sarah Hunter have been talking quite a lot about inflation expectations recently.
And you mentioned earlier the rolling supply shocks that we’ve seen. We’ve seen this constant, with the pandemic, we had Ukraine, now the Iran war, we’re sort of in this world of rolling supply shocks. So do you see a genuine risk that inflation expectations – I know you’re not going to comment on monetary policy per se – but do you think that inflation expectations could de‑anchor at any point? Is there an extra role for the government in that to help with that fight?
Chalmers:
Well, I think it remains to be seen on the expectations front. Obviously, that’s something that Bank focuses very closely on. My job is to play a helpful role in the way that we manage the budget and think about making sure that some of this cost‑of‑living help, for example the excise cut, is temporary and all of those sorts of things. So, we’ve got a role to play there, but primarily that’s their consideration.
What worries me a little bit about this conversation about stagflation is it feels a bit oversimplified. What I mean by that is if people are saying we’re going to have upward pressure on inflation and downward pressure on growth, of course, those are the costs and consequences of a big oil shock coming from war in the Middle East. We saw that in this week’s inflation figures. The primary driver of inflation is the hefty price that people are paying in Australia for that war on the other side of the world.
But what that simplification doesn’t allow for is the tremendous strength of our labour market, for example. I care a lot about the labour market. It comes back to that first question you asked me about our reason for being. I care about the people‑facing part of the economy and the labour market’s the easiest way to understand that.
Our labour market’s in extraordinarily good nick, and in a way that’s not consistent with how we might have traditionally thought about stagflation. We don’t have unemployment galloping at 7, 8, 9, 10 per cent. We don’t have unemployment as high as other countries with which we compare ourselves. That’s why I think some of this, not to criticise anyone, but some of this discussion can risk being oversimplified.
Yeaman:
Yeah, I agree with that. I think that’s also why I mentioned the persistence factor because, stagflation is also not just an episode, it’s a drawn‑out period, a persistent period of higher inflation and lower growth. So, I agree with that of broad sentiment.
Look, you’ve been generous with your time. I wanted to just finish off by asking 2 quick questions about AI. I think if it wasn’t for the war in Iran, we’d be talking a lot more about AI generally and I think it’s still having a big impact on markets out there. There’s 2 very quick‑fire questions I wanted to ask you about that.
One is productivity. So, we’ve had this productivity malaise – not just in Australia, it’s been a global decline – for a couple of decades. I’m quite optimistic that we will see a lift from AI on the productivity front, maybe not for one or 2 years, but in terms of that speed limit, 3 to 5 years from now, maybe. But do you see that as well? Do you think that that’s going to be the answer to our productivity challenges?
Chalmers:
Not the only answer, but I think it will be a positive if we manage it well. Our job as governments and decision makers, in the private sector too, is to try and maximise the upside, whether that’s growth and productivity, but also to minimise the risks, particularly to people and essentially workers. That’s our job. You think about the productivity story, yes, we’ve had 2 decades now where productivity’s been nowhere near where it needed to be. But we had productivity come in at one per cent over the last year, higher than the 20 year average. It’s not too bad, not getting carried away. The market sector’s one and a half now. Market sector productivity’s gone up 5 quarters in a row.
These are not world‑beating productivity figures yet, but they’re better than what we’ve seen. So, we might be seeing some of the front end of that. Our thing about productivity, AI is a huge part of our thinking about productivity, particularly into the future, but not the only part. Compliance costs would be a big focus of the Budget, making it quicker and easier to build stuff, making us more attractive as an investment destination, some of the things that you talked about a moment ago. These are all parts of the productivity puzzle.
The difference between now in 2026 to 1986, is that in order to shift this stubborn productivity under‑performance over a long period of time, we’re going to have to do a lot of things at once. A lot of medium‑sized things at once. What people will see in the Budget, if I can land this productivity package in the next week or so, is people will see a genuine effort to do quite a lot on productivity. Part of that’s AI, but there’s a lot of other stuff in there too.
Yeaman:
People will be very excited to hear that, I suspect, particularly on the building things faster. So many of the things we’re trying to do in Australia now, net‑zero transition, defence, housing, it’s all about building things more quickly. So that’s a good news story.
The very final question I had then is you can’t get around the fact that on AI, people in the community are thinking about what it means for their job security. They’re thinking about what it means for their children. You’ve got 3 lovely children of your own, you’re thinking about their careers, I’m sure. What do you tell people in your electorate in Logan when they talk to you about AI and people around the country when they say, should I be worried about my job? How do you think about that? I know you’ve written and thought deeply about this in the past.
Chalmers:
Well, first of all, not dismiss those concerns. Those concerns can be genuine. There’s a lot of anxiety about how the workforce will change. In it’s best version of AI, it makes people’s jobs easier and augments jobs, rather than have this kind of mass displacement of workers. It’s kind of you to acknowledge I’ve thought about this a bit in the past. I co‑wrote a book almost a decade ago now with Mike Quigley about this issue –
Yeaman:
You’re ahead of the curve.
Chalmers:
Exactly this issue. That’s because our job as leaders is to help navigate people through these anxieties, to try and capture the upside and minimise the downside. I would say to workers in my electorate and around the country, we understand this is a source of considerable anxiety.
Amanda Rishworth just convened a really important discussion with unions and with the private and with businesses about these issues, because unless we can give people comfort about the upside, then we won’t capture the full benefit when it comes to the economics of AI and accelerating technological change. That’s what the book was about all those years ago, back in probably the age of the fax machine.
Yeaman:
There will be fire sales going in the bookstores tonight.
Chalmers:
Yeah, in every good remainder bin. I guess the point I’m making is this thing has been developing for some time. These anxieties are not always unwarranted. Our job is to try and assuage these concerns by making sure that we capture the best version of technological change. And again, to come back to the very, very first thing you asked me, our job is to make people beneficiaries of change rather than victims of change and AI is one of the easiest ways to understand how we can get that really right or get it really wrong.
Yeaman:
Well, that’s probably a great note to finish on and an optimistic tone for the future. I really want to thank you, Treasurer. It’s been a real pleasure talking to you today. I know how busy things are in the couple of weeks before the Budget, so we’re really pleased you could join us on the CommBank View: Economics and Markets podcast, and good luck for Budget night. I’ll be watching closely from the sidelines.
Chalmers:
I really appreciate it, Luke. Thanks for your time.