Peter Stefanovic:
Money markets and major banks are all expecting the RBA to raise interest rates when it makes its latest decision today. That would be a fourth raise this year, which would take the cash rate to a 15‑year high.
Furious mortgage holders and businesses who are already buckling under pressure will want to know why. So joining us live now is the federal Treasurer, Jim Chalmers. Treasurer, good morning to you.
So if there is a rate rise today, which would be, as I mentioned, the fourth of the year, what do you say to those with an average mortgage who’ve had to find another $500 every month this year to pay down that loan?
Jim Chalmers:
Good morning Pete. Obviously, I’m not going to make a prediction about the decision that the independent Reserve Bank will announce later on this afternoon. There are good reasons why Treasurers don’t do that.
We do know that a lot of Australians are bracing for that outcome. And that’s because it’s the universal or near‑universal expectation of economists and markets that we will see rates go up this afternoon.
We know that people are under pressure, we know that when interest rates go up that adds to the pressures that people are already feeling. And that’s why from a government point of view we recognise, first of all, the independent role of the Reserve Bank, but secondly, we take responsibility for managing the budget and the economy in the most responsible way that we can.
We are providing cost‑of‑living relief again in a responsible and affordable ongoing and permanent way, and we’re working very hard at some of the longer‑term economic challenges that have been a feature of our economy for some decades.
Stefanovic:
Why are folks at home though forced to cut their spending whilst the government isn’t?
Chalmers:
Well, spending came down in the Final Budget Outcome that we released yesterday, Pete, and –
Stefanovic:
It’s at 27 per cent of GDP –
Chalmers:
– spending as a share of –
Stefanovic:
That’s the highest in 40 years.
Chalmers:
It’s not actually, Pete.
Stefanovic:
Well, outside of the pandemic it is.
Chalmers:
It’s down from above 30 per cent. Well, it’s an important point that you’ve missed there, Pete, and I’ve heard it repeated too frequently. Spending as a share of the economy was almost a third of our economy when we came to office. We got to down to closer to a quarter of economy. In the current Budget, it is in the high 26 per cents, and it gets down to the low 26 per cents by the end of the forward estimates.
So, spending as a share of the economy is very substantially lower than when we came to office. It was lower still in nominal terms in the budget outcome that we released yesterday. And that’s because we’ve been banking upward revisions to revenue. We found almost $180 billion in savings to improve the bottom line and to make room for our investments in Medicare and bulk billing, public hospitals and providing cost‑of‑living help. And that means that we delivered 2 surpluses, and now we’re delivering much smaller deficits than were anticipated when we came to office. And that means that public debt is a sliver of what we see in other countries as a share of our GDP.
So, we know that there’s always more work to do when it comes to budget repair, but our government has been defined by responsible economic management, very substantially improving government spending as a share of GDP, very substantially improving the budget bottom line, and that’s why our debt is a sliver of what other countries are having to carry.
Stefanovic:
Why is our total debt at a record high then?
Chalmers:
Well, our debt today is about $980 billion, almost two‑thirds of that was racked up by the Coalition in their 9 years of office.
Stefanovic:
Well, much of that you supported as well [inaudible].
Chalmers:
Pete, in addition to the debt that was racked up during COVID, don’t forget that before COVID they doubled the debt. So, some important facts to put on the table. These are not opinions, these are facts.
Almost two‑thirds of the debt in the budget was racked up by the Coalition in their 9 years in office, and also, another important point is if you look at the debt trajectory 4 years ago compared to now, public debt is about $200 billion lower compared to the trajectory when we came to office. That’s saving us about $70 billion –
Stefanovic:
– It’s still a record high though, Treasurer.
Chalmers:
It is lower than the trajectory that we inherited, for all of the reasons that you and I have spoken about over a long period of time now.
And so, when the Coalition talks about that public debt, remember almost two‑thirds of it was added by them in their 9 years in office.
Now we are managing the budget in an extremely responsible way. We’ve got spending growth down to less than half what it was under our predecessors. Even if you look at public final demand growth in yesterday’s figures is the lowest it’s been for more than a decade now, and it came in lower than we thought even in May in the Budget.
And so we do know that responsible economic management and budget repair requires our ongoing attention, we acknowledge that on almost a daily basis, but we have made a lot of progress in the budget, and that’s because we accept responsibility for our part in the fight against inflation, managing the budget responsibly, providing that cost‑of‑living relief at the same time as we work on some of these longer‑term economic challenges like productivity.
Stefanovic:
Why is our cash rate the highest in the developed world then, bested only by Iceland?
Chalmers:
Well, you’ve got to make the full comparison, Pete. We’ve got faster employment growth than every major advanced economy, we’ve got faster economic growth than every major advanced economy, except we’re equal with the US, we’ve got very low debt as a share of our economy compared to other countries.
And so, you’ve got to make the full comparison right across the board. We’ve had stronger growth than a lot of countries, we’ve certainly had lower unemployment and stronger jobs growth than a lot of countries, and so you see that play out as well.
Now, one more important point, Pete, when you hear people talk about the role of public spending and people who want to pretend that public spending is the primary driver of prices in our economy, they weren’t saying that last year when inflation was coming down and interest rates were being cut.
There are a whole range of factors playing out in our economy. We do have an inflation challenge. It is made much worse by the war in the Middle East; that’s not an opinion, that’s a fact. We’ll see that in tomorrow’s inflation figures for August.
One of the worst developments that we have seen in our economy is the re‑escalation of this prolonged war in the Middle East. And our inflation challenge has a number of sources, but right now the big driver of inflation that we’ll see in tomorrow’s inflation figures is the fact that this war has now dragged on for more than 6 months. It’s been absolutely disastrous from a cost‑of‑living point of view for Australian families, particularly but not exclusively at the petrol bowser. And that is a big driver of the inflation challenge that we have in our economy.
Yes, there are other sources as well. We do have an inflation challenge in our economy. It’s made much, much worse by decisions taken on the other side of the world, and that’s just a fact.
Stefanovic:
Well, the economist, Chris Richardson, he said in the SMH today, the war in Iran has made matters worse, you are right, but years of elevated spending from federal and state governments ‘made the ongoing inflation problem worse’. So, is he and other economists wrong?
Chalmers:
Well, a couple of points about that. I mean, first of all, I don’t want to go through all of the numbers again, but to remind your viewers that spending as a share of the economy’s down very considerably in our time in office –
Stefanovic:
But again, it’s 27 per cent outside of the pandemic, a 40‑year high.
Chalmers:
And it tracks down to about 26 per cent. It was more than 31 when we came to office. We got it down to about 25, it’s now in the 26s, and expected to fall over the course of the next 4 years.
And again, you know, our savings are playing a role, banking upward revisions to revenue are playing a role, limiting real spending growth to slower than what we saw under our predecessors, all of that is part of managing the budget responsibly.
Now, the other point that I’d make about Chris, who I like and respect, is that Chris wasn’t making the same point about government spending being the primary driver of prices in our economy when inflation was coming down quite swiftly and the Reserve Bank was cutting interest rates last year.
There are a whole range of factors playing out in our economy.
Stefanovic:
Treasurer, do you accept government spending is in any way contributing to our inflation problem right now? We’ll have to close on this.
Chalmers:
Government spending is part of aggregate demand, and what we’ve seen in the last year is that of every $5 in demand in our economy, 4 of those dollars have been from the private sector, not from public spending, and so that’s a really important thing for your viewers to understand. Every $5 of demand in our economy over the last year, 4 of it was generated by private demand, one of it by public demand.
And what that shows is that there are a whole range of factors playing out in our economy right now contributing to this inflation challenge, but right now the big mover has been the reescalation of the war in the Middle East, which people are paying for at the petrol bowser and which will push up the inflation figures that we see tomorrow at 11.30.
Stefanovic:
Okay, Treasurer Jim Chalmers, appreciate as always your time.