ROSS GREENWOOD, HOST:
I caught up with the Treasurer late this week and asked him whether Australia would avoid recession.
JIM CHALMERS, TREASURER:
That's our expectation Ross - that the economy will continue to grow, but so for the meantime will our economic challenges. What today's economic statement was really all about was bringing Australians into our confidence so that they know the expectations of the Treasury for the future of our economy over the coming months and years as we put together what will be a difficult balance to strike in the October Budget.
GREENWOOD:
Okay, as the Treasurer though, what keeps you up at night? What is the worry that you think could really be the vulnerability in these numbers and these forecasts that could lead to a worse outcome?
CHALMERS:
Look obviously, there's a lot of uncertainty. As you know, probably as well as anyone who's been following forecasting for a long time now, it's difficult to forecast the future of the economy, particularly in volatile times. But the choice that we had to make is whether or not to bring people into our confidence and reveal that the economic expectations that Treasury has given us, or to keep them to ourselves. And so I thought on balance it was best to release them so that people can hold them up to the light and see what we are dealing with and what we as a country are dealing with at the same time. But when it comes to worries about the risks to the forecasts, I mean, obviously, the wages forecast has been difficult for some time. Clearly, there's a lot of concern about the global economy - which I share, frankly - out of China, out of the US, out of Ukraine, and around vulnerable countries dealing with different versions of debt crises like the Sri Lankans and others.
So there's a lot to concern us about the update today. But really, what I wanted to say, Ross, to the Australian people via their parliament, is I'm actually quite optimistic and quite confident that we can weather the storm together. But there will be some heavy, heavy weather for the time being whether it's inflation, rising interest rates, slowing growth, what that means for the unemployment rate. We are in for some heavy weather. And I'd rather be up-front with people about that so that they know what we're confronting together.
GREENWOOD:
So annual inflation of 7¾ per cent, then ultimately rising unemployment from 3½ per cent to 4 per cent, and then the inevitable rising interest rates will come. That's where the heavy weather really is. But how well prepared do you think Australian households are to cope with it?
CHALMERS:
Some have a bit of resilience built into their household budgets and that's obviously a very good thing. Some people have been able to get ahead, for example, on their mortgage repayments, but a lot of people haven't. A lot of people don't have those buffers in their household budgets. And even if they're not homeowners dealing with rising interest rates, the inflation problem itself really punishes people who are the most vulnerable. That's why we supported that decent pay rise for people on low incomes, for example, because they are the people who are hurt the most by rising inflation. Inflation, as you know, has the capacity to absolutely destroy household budgets.
People are trying to substitute out what they don't need in their budget for the things that they really need. And we're going through a similar process, frankly, at the national level. Because our budget, the national budget, has got a lot of debt in it, which is becoming more expensive to service as interest rates rise. And so we've got to make sure that every dollar we spend is going to productive purposes as well.
GREENWOOD:
The other thing that you are aware of is that inflation, high inflation, if it's persistent, ultimately leads to unemployment as employers really make a decision about cutting costs in the face of their own rising costs. And so that's where there is potentially a risk. Is one of the real issues right now that if wages expectations get out of hand and that bakes the inflation into Australia's economy, and that leads to persistently high interest rates, which really do damage Australia's economy and make it vulnerable?
CHALMERS:
Well, that concern that you raise, and it's a concern that's often shared with me, is actually the reason why I released those detailed inflation forecasts today, because I wanted people to know that even though we expect or Treasury expects inflation to peak at 7¾ per cent towards the end of this year, inflation in their expectation will moderate after that and will normalise the year after. So I wanted to give people a sense not just the size of this challenge, but the shape of it as well. And because we don't want those inflation expectations to bake in for years, I thought it best to let people know what we thought about inflation moderating and then normalising because that issue that you raise would be a concern, if we were expecting inflation to stay high forever.
GREENWOOD:
Okay, but this must also be something of a debate even inside your own partyroom because you would have members who would be highly sympathetic to the fact that workers should be getting inflation-style pay rises. Now given inflation goes to 7¾ per cent that might be something that ultimately could bake in the inflation long term and ultimately be damaging, how do you balance it up as the Treasurer?
CHALMERS:
I think all of our team understands that we do want strong wages growth, but we want it to be sustainable. You know, I don't hear anybody in our team calling for exorbitant wages growth. What people really want to see is something that's strong and sustainable at the same time and enduring. And there is a high level of understanding not just in our side of the parliament, but I think in the Australian community that one of the problems we've had with our economy for the best part of a decade now is those stagnant wages. We've got real wages going backwards quite considerably at the moment, unfortunately. And so our job is to see that inflation moderate, do our bit on the supply side in particular, but also to get those real wages growing again.
I think it's in the interests of all Australians that as we rebuild this economy after this difficult period that sustainable wages growth is part of the story. And that means productivity is part of the story. It means investing in the future of our economy, strong and secure well-paid jobs is a big part of our agenda. Because what we want to see is these wage increases to continue to endure, and to be responsible and sustainable at the same time.
GREENWOOD:
Okay, let me go to deep into your own statement this week. Your own speech, you say: we expect that government payments will be around $30 billion higher over the forward estimates than was forecast pre-election because of inflation and wage expectations and how they flow through. The problem I have with that statement is you're almost predicating or pre-indicating that there are going to be baked-in wage expectations.
CHALMERS:
Respectfully Ross, I don't see it that way. And I'm pleased I've got the opportunity to provide a view on it. The inflation part of it is obviously easy to understand a lot of government payments are indexed to inflation. The Age Pension, for example, will go up in September as a consequence of that and that's a good thing. But that means that the budget, wears the heavier cost of that - that's easy to understand. On the wages side, we are actually forecasting - or Treasury is forecasting in these figures today - a moderate uptick in wages growth, and it takes a little while for that to crossover with inflation to get real wages growth. But when it comes to the wage price index, we're actually revising up moderately our expectations for wages today. And so that flows through to those payments, which are indexed to wages rather than the CPI.
GREENWOOD:
One thing you've been saying in recent times, I've heard you say it a number of times, is that not every good idea can be funded. And this actually goes to the area of fiscal discipline. In other words, making certain that you really do look at that spending area inside your budget. There's a second aspect of this also and that is that right now the budget is in rude health. If I go back to the the May accounts from the Department of Finance, they showed that Australia's budget was in surplus at that time. And indeed, over the course of this last financial year, it will be at least $30, maybe $40 billion better off than where it was expected to be. So right now, it's fair to say that the budget is in rude health. It's not necessarily the basket case that maybe many people presume.
CHALMERS:
The first part of that question I agree with, Ross, but certainly not the last part of it. We've got in the budget a trillion dollars of debt, as you know, and even with that quite welcome bump that we got from high commodity prices, combined with some other elements, which I'll come back to, even with that, we've still got what will be decades of deficits. And so I wouldn't accept that the budget is in good condition. But I do accept, I do agree that the budget which finished at the end of June, perhaps the very beginning of this budget year that we're in now, it has been really substantially pumped up by a much higher than expected commodity prices, but also the inability to get some of the spending out the door in areas like infrastructure because of this supply chain crunch. And so there has been a lot of revenue from high commodity prices, there has been a lot of spending pushed out of last year and into this year and beyond. And that means there will be a dramatic improvement in the budget for last year. That's a good thing in one way, but it still doesn't mean the budget is in good nick. And unfortunately for all of us, particularly perhaps for those of us making decisions about the budget, the things that have been going for us in the budget are not permanent. They're highly temporary, whereas the pressures are more permanent, whether it's those payment pressures or issues around necessary spending on the NDIS or aged care plus of course the cost of servicing the debt itself.
GREENWOOD:
The one thing that is going for you, though, is employment with a 3½ per cent unemployment rate, with a record participation rate, record numbers of men and women in the workforce right now. And given that the government traditionally has earned around half of its income each year from PAYG taxpayers, I mean, that's the thing that's pumping up the budget along with those commodity prices.
CHALMERS:
We're very pleased about that. Obviously, that's a very welcome development. Seeing unemployment at around 3½ per cent is obviously something that we are very welcoming of. It's a very good thing. It's one of the things that we've got going for us in our economy. We've got relatively strong demand, we've got that low unemployment, we've been getting good prices for our commodities until the last few weeks. And all of that is heading in our direction and helping us out in the budget. But unfortunately, we've got much more going the other way, whether it's subsequent waves of COVID, whether it's the consequences of the war in Ukraine, whether it's the China slowdown, or fears about the US, or the impact of rising interest rates. And that's why in aggregate, the Treasury forecasts I released today has economic growth slowing. That has implications, as you know, for the unemployment rate as well. And these are some of the challenges that we're dealing with and being up-front about.
GREENWOOD:
Treasurer Jim Chalmers, always good to chat to you and many thanks for your time today.
CHALMERS:
And you Ross, all the best.