THE HON JIM CHALMERS MP
MEMBER FOR RANKIN
WEDNESDAY, 8 JUNE 2022
SUBJECTS: Interest Rate Rise; Reserve Bank; Inflation; Costs Of Living.
NEIL MITCHELL, HOST: Interest rates – worse than expected, up half a per cent, 0.5 per cent. The highest level in – do you know the last time that we had a rise this long, we were talking about Sydney Olympics, the internet was just taking off, mobile phones were just beginning to boom, and we’re told it could be the same next month. So, it could go up by one per cent in a couple of months, one per cent, one per cent, so what do you do? We’ve already taken calls. Do you tighten your belt? Do you change your spending habits? How do you change your life? And we’ve had a few listeners call, “Hang on, hang on, we remember 17 per cent interest rates. This isn’t the end of the world.” On the line is the Federal Treasurer, who has been pessimistic about what’s ahead. Dr Jim Chalmers, good morning.
JIM CHALMERS, TREASURER: Good morning, Neil, how are you?
MITCHELL: I’m good. Thank you for your time and congratulations on your win.
CHALMERS: That’s very kind of you.
MITCHELL: You’re telling us that very tough times are ahead. Is there anything, really, you can do to help us?
CHALMERS: There is, Neil in talking about tough times ahead, I made a decision when I became the Treasurer that I wouldn’t mince words and that I would try to give it to people straight when it comes to the outlook for the economy, and I’m confident about the medium-term prospects for the economy but in order to for us to get there, we need to navigate some choppy waters in the interim. The most difficult part of that challenge is around inflation and what that means for the higher interest rates that accompany that inflation. What we saw yesterday with the Reserve Bank decision of the increase of half a per cent in the cash rate flowing through to mortgages is really difficult news for a lot of people who are already facing the skyrocketing cost of living. Unfortunately, whether it’s the Reserve Bank, the Treasury, or other analysts, there’s almost a universal view now that we’ll get more difficult inflation before it starts to get easier. There’s no use tiptoeing around that. I’d rather be up-front about it.
MITCHELL: Do me a favour. “Choppy water” is all right, but if I hear one more economist talk about strong headwinds, I’m going to scream! So how are we feeling? How are we the average person listening now hears this, sounds bad, how is it going to touch us in our real lives?
CHALMERS: The best way to think about it is around Australia the average outstanding balance on a mortgage is $330,000 and what was decided yesterday means that people have to find another $87 a month to service that average outstanding mortgage. For a lot of people, if you think about the Victorian new mortgage average, that’s more like $637,000 and so for somebody with an average new Victorian mortgage, they’d have to find $174 a month. You can see how these interest rate rises, which sometimes sound small when they’re announced, can sting, particularly at a time when a lot of Victorians are facing spiking prices for their energy, and to some extent their groceries as well. So, it’s a tough decision. It was expected yesterday that there would be higher interest rate rises. Unfortunately, there’s an expectation that there will be more to come, but the fact that it’s expected doesn’t make it any easier for people if they have to try to find this extra money to service their mortgage.
MITCHELL: So, what could they be looking at by the end of the year? I mean, we’re talking about seven per cent inflation at some stage.
CHALMERS: The inflation rate will be worse than 5.1 per cent, and I’m going to update on that number when the Parliament returns. The Reserve Bank Governor said yesterday that even in the last month his expectations for inflation have gotten worse, rather than better. When it comes to the level of interest rates, not just me, but all my predecessors have tried to not pre-empt the decisions of the Reserve Bank, but they’ve made it pretty clear – when they started raising interest rates under the last Government, that there would be in their expectation a series of interest rate rises. So, all the people who watch the Reserve Bank closely are anticipating that there will be more to come through the course of this year.
MITCHELL: Obviously, there’s a need for an increase in wages, no question about that, because wage earners have fallen behind but there needs to be a sweet spot doesn’t there between that pay rise and it not being inflationary. I mean, is it likely there’s going to need to be a more than 5.1 per cent pay rise or a quick one soon afterwards?
CHALMERS: I think it is important to think about the different parts of the workforce when it comes to these wage rises. One of the things that troubles me and a lot of people about high and rising inflation and higher interest rates is that the impact is felt disproportionately on people who are already living, week to week, pay cheque to pay cheque. The reason why the first decision out of the new Albanese Cabinet was to support a decent wage rise for low-paid workers is because we desperately need them to be able to keep up with the skyrocketing cost of living.
The broader story is more complex. You do need to strike the right balance in wages, and the most important way to understand that is wage rises can be affordable, responsible and sustainable if they come with improvements in productivity. That’s why our economic plan, whether it’s training, whether it’s child care, whether it’s the NBN, whether it’s advanced manufacturing, is all about trying to make the economy more productive, because the more productive it is, the faster it can grow without adding to inflation and the more you can get those responsible, sustainable wage rises as well.
MITCHELL: So, is there also not argument that it shouldn’t flow through because it tends to flow through, it goes to lower paid workers who need it desperately and then the next thing it goes into awards. Do you argue it should not flow through to award wages?
CHALMERS: Well, that’s really a decision for the Fair Work Commission.
MITCHELL: You can submit on it, can’t you?
CHALMERS: We made a submission. We said that our priority is low-paid workers not going backwards. I worked closely with the Treasury, Tony Burke and with Anthony Albanese on making that submission. It’s pretty considered and carefully worded. At the end of the day, it’s a decision for the Fair Work Commission and that’s appropriate.
MITCHELL: What is your preference? Should it not flow through to award wages?
CHALMERS: I haven’t expressed a view on that deliberately, because the role of the Government is to say: What’s our recommendation? Or what are we encouraging the commission to do? We’ve done that. We’ve used the definition of low-paid workers in the submission that we’ve made and then the commission will take that and do with it what they will. But I think broadly the most important thing here is we recognise that the impact of high and rising inflation falls disproportionately on people, so our first priority should be people who are earning at the moment, $20.33 an hour.
MITCHELL: I noticed the Reserve Bank says we’re not sure what happens with household spending in the future and that could be important. I remember Josh Frydenberg, your predecessor, carefully saying to me at some stage coming out of the lockdowns we wanted people to spend. Do you want people now to spend or not to spend? Will they put off big spending?
CHALMERS: Unfortunately, for a lot of people, they don’t really have a choice now because one of the things that is really stark out of the inflation numbers is that inflation is biting hardest where people don’t have any discretion. Think about petrol prices, energy prices, groceries, the sorts of things that Victorian families can’t do without – those are the areas that are spiking most substantially. So, people will make their own decisions in their own household budgets. I have a lot of conversations with people about cutting back on maybe their on-demand TV subscriptions or other people are making decisions like that. Every family and every household is different. I try not to give them free advice, but they are making room for these increases in prices for nondiscretionary spending. And one of the reasons why this inflation is so damaging to our economy is we don’t want people having to choose different parts of their household budget which in normal times they wouldn’t be able to avoid spending on.
MITCHELL: Notoriously, the banks when there’s a reduction in interest rates take forever to pass it on. When there’s an increase, they pass it on quickly. Are you keeping an eye on them to make sure they pass it on to depositors quickly?
CHALMERS: That’s part of the discussion I’ve been having with some of the banks, and I think I’ve got a meeting with all of them collectively in the next week or two. That is an issue. I try to be pretty up-front with that as well. I think the Australian community is watching them like hawks to make sure that it is passed on to deposits as well. When you think about all the damage that rising interest rates do to mortgage holders, there is a bit of a silver lining for those people who live on savings, and you and I have spoken about them before. If they can get those increases in the deposit rates, then that will help them a little bit as well. That part of the Australian community has had a pretty rough trot the last little while.
MITCHELL: So, you’ll convince the banks gently that they should do that?
CHALMERS: That’s my view. I put that view to the banks when I have those opportunities. That’s certainly my view and if customers aren’t getting the kinds of outcomes that they want, we hope that there’s enough competition in the banking sector that people can go and find a better deal if another bank wants to treat them more kindly than their existing provider.
MITCHELL: Are you still intending another budget sometime, what is it – October?
CHALMERS: I’ll do the Budget in October. When you consider this combination of economic challenges, it’s not really an option to wait until May. That would be 13 months between Budgets and that would be too long. We’ll hand down a Budget towards the end of October, the second half of October, and that will be really about a few things. First of all, implementing our commitments; secondly, trimming spending where we can so that that we’re directing that money towards good economic purposes and away from the kind of political slush that’s defined a lot of the Budgets over the last decade or so. And also, trying to begin to chart the course to the stronger economy that comes after the difficult times that we have now. Some of the things I’ve been interested in is how do we budget for some of our longer-term priorities as well. You’ll see that in October.
MITCHELL: Does that mean some of our election promises have to be on the table to possibly be delayed?
CHALMERS: Our election commitments were pretty restrained and responsible by any sort of historical measure. We tried to cut our cloth a bit because we knew, we anticipated, that these inflation pressures would be in the economy if and when the Government changed hands. So, most of the things that we’re committing to aren’t inflationary. They’re designed to grow the economy without adding to inflation. Some of those issues I touched on briefly before, around training, the NBN and child care, these are actually part of the solution, rather than part of the problem when it comes to inflation. But we’re certainly going through the budget line by line to make sure that we are beginning to deal with that kind of legacy of wasteful spending which has defined the budgets for too long. Katy Gallagher and I are already on that task, and you’ll see the fruits of that in October as well.
MITCHELL: Sorry I don’t understand from that. Are any of the election promises on the table for review?
CHALMERS: No, we’ll implement our commitments, but we will run the ruler through the budget that we inherited to see if there are additional ways to trim spending to fund those commitments. This kind of got lost in the wash of the election campaign, we’ve actually already identified $11.5 billion in budget improvements, which is a pretty good effort for an Opposition, and we expect that there will be more.
MITCHELL: Cuts invariably hurt. They will hurt somehow, won’t they, somebody?
CHALMERS: Our job is to make sure that the impact doesn’t fall disproportionately on the people who can least afford it. There’s a lot of programs in the budget, for example, there’s a lot of discretionary funds and buckets of money for in the past for National Party Ministers to kind of spray around electorally sensitive parts of Australia, to put it mildly. We’re looking at some of those funds to make sure that we’re actually getting an economic dividend from them, rather than just a political dividend. So, there are opportunities like that which aren’t about punishing people who are already finding it hard enough to make ends meet.
MITCHELL: Tax cuts still guaranteed?
CHALMERS: Those are already legislated. We said we don’t intend to change that. They don’t come in for a couple of years still. So, our priority when it comes to trimming spending is in the nearer term and because of this inflation challenge that we’ve inherited. We haven’t changed our view on the tax cuts.
MITCHELL: Really appreciate you giving us so much time. Thank you. Hope we’ll speak again soon. Thank you very much.
CHALMERS: Appreciate your time, Neil. All the best.
MITCHELL: Dr Jim Chalmers, the Federal Treasurer.