PATRICIA KARVELAS, HOST:
With inflation surging and the International Monetary Fund warning the world stands on the edge of a global recession, the Treasurer will today cut economic growth forecasts for the year ahead.
Yesterday, Jim Chalmers confirmed that inflation had risen more sharply than expected to an annual rate of 6.1 per cent. Today he’s expected to confirm that growth for the last financial year came in half a per cent below expectations and outline just how bad things could get in the year ahead. The Treasurer joins me now from our Parliament House studios. In fact, he’s sitting opposite me. Treasurer, welcome back to Breakfast.
JIM CHALMERS:
Thank you for having me back, Patricia.
KARVELAS:
And I will put your microphone on. Welcome. Growth for the 2021-22 financial year is half a per cent lower than Treasury’s forecast before the election. What’s the forecast for the current financial year?
CHALMERS:
Well, we expect, Patricia, that economic growth will slow by about half a percentage point last year, this year and next year, and that’s a consequence of a couple of things. As you rightly point out, the global economy is treading a pretty perilous path right now and that has implications for our economy, but the interest rate rises as well will have an impact and that will flow through to economic growth in our country which has implications for the unemployment rate and for other key measures in our economy.
So, what I hope to do today is to bring the Australian people into our confidence when it comes to our expectations for the economy as we frame the October Budget. There is no use pretending that we aren’t in for some heavy weather, but I am very confident that Australians will weather the storm once again, but we need to brace ourselves for a difficult period in the next little while. And I want to talk about that today in a way that brings people into our confidence and paints a more accurate picture of the economy that the new government has inherited.
KARVELAS:
You say this is not a surprising outcome. A few months ago, the RBA expected inflation to hit 7 per cent by December. Have you asked for a reviewed December forecast, and do you expect it to be higher?
CHALMERS:
I do.
KARVELAS:
How much higher could it get?
CHALMERS:
Well, what I will be talking about today is an inflation forecast north of 7 per cent, which is confronting. When we got that new number yesterday for the June quarter, it wasn’t especially surprising that number yesterday, but it was still confronting because what it means is every dollar that Australians earn is not able to be stretched as far as it was before, and people understand that. People don’t struggle to understand that we’ve got an inflation problem in our economy because they feel it in every aisle of every supermarket. They feel it when the bills arrive. But what I hope to do today in painting that more accurate picture is to give people a sense that yes, inflation will peak in our expectation, in Treasury’s expectation, later this year and then start to moderate. But it will moderate. Inflation will come down again. It is primarily but not exclusively global. It is temporary, but it won’t disappear overnight. So, I want to talk people through our expectations for that as well.
KARVELAS:
How much will the end of the temporary cut of the fuel excise drive inflation up by?
CHALMERS:
There’s a couple of things that are yet to happen beyond the inflation numbers that we got yesterday. First of all, there’s the big spike in electricity prices, which was hidden during the election, which came in in July. We expect that to have a fairly substantial impact on the next inflation numbers that we get. But, obviously, as well, when the support at the petrol bowser comes off in September, as it’s legislated to do, that will have an impact as well. So, we’ve factored that in to our expectations, but there are other big drivers of inflation.
Obviously, the global scene, energy and food security is a big part of that, but domestically, there are factors we have an influence over – not immediately; we can’t flick a switch and make all this inflation disappear but we can deal with some of the issues in our supply chains that people understand are pushing up prices and that’s why our economic plan is about responsible cost‑of‑living. It is about lifting the speed limits on the economy by dealing with these supply chains issues and it is about trimming the rorts and waste that’s been a defining feature of the Budget for too long so that we can invest that money for an economic purpose and not just a political purpose.
KARVELAS:
So, Treasurer, level with us. You say you want to bring Australians into your confidence. That makes sense. So, should Australians be prepared for a recession?
CHALMERS:
That’s not our expectation –
KARVELAS:
But should they prepare for the worst? Do you think that’s a possibility? It’s not your expectation, but it’s clearly a possibility.
CHALMERS:
That’s not one of the possibilities that we’ve been dealing with. I think Australians should brace for a difficult period, but we expect the economy to grow but so will our economic challenges, which is really a way of saying that things will be difficult, inflation will get worse before it gets better, but it will get better. So, what I’d like to do today in painting this picture of the economy and showing people what our expectations are, I also have confidence that we will weather the storm. I do genuinely believe that Australians are remarkably resilient and my job as Treasurer and our job in the Albanese Labor Government is to try to make our economy and our Budget as resilient as the Australian people are, and I think there’s an appetite for some real talk about that. There’s a hunger for bringing people together to deal with some of these challenges and there’s an understanding that you can’t fix some of these economic problems which have developed over 9 years. You can’t fix them in 9 weeks, and people understand that.
KARVELAS:
Banks have been forecasting that interest rates could hit 3.35 per cent by the end of the year. Where do you expect the cash rate to be by then?
CHALMERS:
Well, obviously, I don’t pre‑empt the individual decisions of the independent Reserve Bank for all the reasons that you and I have discussed for some years now, but the Reserve Bank has itself said that interest rates will go up further. What happens in our forecast is the Treasury advises on the most appropriate assumption for interest rate rises and applies that to our forecast and that’s what’s happened again. The –
KARVELAS:
Would you use the Prime Minister’s language and warn them not to overreach?
CHALMERS:
I thought that was a bit of a beat‑up, frankly, the way that was –
KARVELAS:
He did use the words.
CHALMERS:
No, I understand that; I’m not denying that. But I think he was making a pretty obvious and uncontroversial point, which is that the Reserve Bank has difficult balances to strike, and they understand that. I mean, that’s the sort of language that they’ll frequently use, which is they are trying to take some of the sting out of this inflation in a way that doesn’t excessively slow the economy and that’s a difficult balance.
KARVELAS:
What happens if they go too hard too fast in terms of householders, because you’re not as confident as there are these huge buffers that were built up? You think people are at real risk.
CHALMERS:
I think some people have buffers in their home loans and so it is not inaccurate when the banks and others say that some people have buffers in their home loans, but interest rates have a broader impact on the economy. And what I was talking about yesterday when I was talking about people choosing between rent and vegetables, I was talking about the inflation problem. Every dollar that people have buys less. That’s what inflation is. And that is really tough for a lot of people. And I don’t want people to be forgotten. You know, we don’t have the sort of Budget that allows us to spray money around –
KARVELAS:
Let me take you to something – fixed incomes. People on welfare payments, for instance, where the cost of living goes up but you’re on a fixed income; you can’t keep affording things. Will you look at measures to help people in those dire straits?
CHALMERS:
The important thing to remember there is when inflation is high in our pension system, twice a year the inflation gets applied to the payment and I know –
KARVELAS:
It’s different, though, for the unemployment rate.
CHALMERS:
I know it’s different and I know that it’s tough regardless, but it is important to remember that if you are on the aged pension or some kind of pension, there will be in September quite a large increase because it reflects the inflation in the economy, not enough and I understand all of the issues there. I can imagine what the text line is doing right now but there is some help on the way for pensioners.
KARVELAS:
You’re going to also see a hit to your Budget. Does that mean that some of your promises are not affordable, the promises you’ve made because there has been a revision?
CHALMERS:
No, I think the commitments that we made, which were already pretty responsible and pretty restrained given that trillion dollars of debt in the Budget that we’ve inherited, but they’re more important than ever because our promises are about some of those key objectives ‑ cost‑of‑living relief, growing the economy the right way. Our promises and our commitments are actually more important now than they were when we announced them. So, we will be implementing them in the October Budget, but we are looking at other ways to trim spending in other areas.
KARVELAS:
Just on unemployment, should Australians expect unemployment to rise?
CHALMERS:
Our forecast today will have a modest increase in the unemployment rate. It’s at 3.5 per cent, of course, which is historically low, the lowest in our lifetimes. So, people should expect a modest increase in the unemployment rate. That is an inevitable consequence of an economy which will grow a bit more slowly because of those rising interest rates and the global growth downgrade that we’ve been talking about.
KARVELAS:
Final question, we’re about to hit the news and AM, but in terms of wages, you built expectations that wages will rise, but clearly with inflation at these rates, we are going backwards, many workers are going backwards consistently. Will workers see a material increase in their wages in this term of Parliament?
CHALMERS:
Yes, that’s our expectation, and I’ll talk about that at some length today. There are two parts to it, as you know. Inflation north of 7 per cent – there’s no credible person forecasting wages growth that high, and so for the time being, it will be a difficult period when it comes to real wages, but our expectation this term is that we will get wages growing again, inflation will moderate, and we’ll get that real wages growth. This has been one of the primary objectives of our economic policy and we expect to see the situation turn around this term.
KARVELAS:
Treasurer, lovely to speak with you.
CHALMERS:
Thanks very much.
KARVELAS:
That’s Jim Chalmers, the Treasurer.