Interview with David Speers, Insiders, ABC
DAVID SPEERS:
Jim Chalmers, welcome to the program.
JIM CHALMERS:
Thanks very much, David.
SPEERS:
So last year when you were Shadow Treasurer and inflation hit 5.1 per cent, you called it a full‑blown cost‑of‑living crisis. What would you call it now?
CHALMERS:
Well, David, I think that's an important reminder that the biggest quarterly contribution to this inflation we have in our economy right now was actually the March quarter before the election and interest rates started rising before the election as well. We've been very up‑front in saying that inflation is the biggest challenge in our economy and that's why it's the major focus of the Albanese Government and our economic plan.
SPEERS:
Yes, but it's gone up since then. It's now significantly higher than five per cent. We've had nine interest rate rises since then. If that was a full‑blown crisis, what is it now?
CHALMERS:
Well, it's a very difficult time for Australians dealing with these cost‑of‑living pressures which are coming at us from around the world but being felt around the kitchen tables of this country. And that's why the primary focus of our economic plan is a combination of three things ‑ cost‑of‑living relief where it doesn't add to inflation, dealing with the issues in our supply chains including our workforce issues that we inherited. And thirdly, showing some spending restraint in a responsible Budget. So the three parts of our plan are the three Rs ‑ relief where we can, repair and restraint. Those are the most important things that we can be doing right now and that's why the ratings agencies and the international organisations have endorsed our plan.
SPEERS:
Well I want to get to some of those elements. Just on electricity prices, we were just talking about that. Can you just clear this up for us because we were told in October that electricity prices would go up some 56 per cent. That was then revised down a little bit, revised up a little bit, in fact, in December. What's the situation now? How much will electricity prices rise?
CHALMERS:
Our energy plan is taking the pressure off inflation. That was the key conclusion from the Reserve Bank's forecasts on Friday and the new numbers which are out today. Our plan is designed to take some of the edge off these energy price rises and we're really encouraged to see that's the case. We're obviously not getting carried away, some of the price rises from last year are still flowing through to bills, but it's a very encouraging outcome. In the Budget for electricity, for example, the forecast was a 30 per cent increase, that became 36. Now we're expecting something closer to 23. But those forecasts will be updated as well. But it's also an important reminder ‑ and you played Angus Taylor a moment ago ‑ when the Opposition voted against our energy plan, they voted for even higher inflation. Our energy plan is taking some of the edge off this inflation in our economy and that's a good thing.
SPEERS:
So 23 per cent electricity price rise this year, what about the following year, because that was meant to be a further 20 per cent, I think?
CHALMERS:
No, we're talking here about the second year of that forecast. The first number was the one that Angus Taylor hid from the Australian people during the election. We're dealing now with that ‑ what was 30 per cent at the Budget, 36 per cent in December, now looking more like 23 per cent but that will be updated in May. The most important thing to understand is that these new numbers out today, which are about the prices which are expected to flow in 2023 as a consequence of our plan, they are lower than they would otherwise be because of the steps that the Albanese Government is taking.
SPEERS:
What's the Treasury analysis on the gas price?
CHALMERS:
We'll update that in the May Budget as well. I don't have that number for you today.
SPEERS:
Why didn't they do gas as well as electricity for you today?
CHALMERS:
The assumption at Christmas time was that a 20 per cent increase would be more like single digits, more like somewhere closer to five, I think four or six per cent, but we'll update that in the May Budget.
SPEERS:
When will power prices fall?
CHALMERS:
It depends on the trajectory of the energy market from now. We have numbers for the next year, we've seen some indications of that in the newspapers today, very encouraging indications that our energy plan will work through the course of 2023 but we'll update the figures, the forecasts for electricity and for gas in the May Budget.
SPEERS:
Will they fall before the next election?
CHALMERS:
We'll update that in the May Budget, David.
SPEERS:
Alright. The Reserve Bank is flagging more interest rate rises. Are you still confident we'll avoid a recession?
CHALMERS:
That's our expectation based on the government's forecasts and the Reserve Bank's forecasts so both of those institutions expect us to avoid that scenario. But clearly, we've got a combination of challenges in the economy right now and we expect our economy to slow considerably this year, both the Reserve Bank and the Treasury expect that to be the case because of that combination of consequences flowing through from higher interest rates and some tricky global conditions.
SPEERS:
Your Labor colleagues are openly criticising the Reserve Bank Governor, we saw a bit of that just before. Some have said that he's using outdated data, ignoring the plight of mortgage holders and renters. Are they right?
CHALMERS:
I respect the independence of the Reserve Bank, David and I think some of the points that people have been making through the course of the week about the lag impact of interest rate rises or the fact that the Reserve Bank expects inflation peaked at the end of last year ‑ I don't think those points are especially controversial and when it comes to the Governor more broadly, we'll come to a view as I've said a number of times closer to the middle of the year after consultation with the Prime Minister and my Cabinet colleagues about whether or not the Governor is reappointed.
SPEERS:
But right now, is he doing his job properly?
CHALMERS:
He's got a hard job to do. He's got to balance getting on top of this inflation challenge without crunching the economy.
SPEERS:
Is he doing it right?
CHALMERS:
I'm not going to second guess the Reserve Bank Governor.
SPEERS:
You can say he's doing his job properly.
CHALMERS:
I genuinely respect his independence, as I've said probably hundreds of times in Opposition and now in government, I think that's an important feature of the system. I'm not going to second guess the decisions. I've got my own job to do ‑ that best combination of relief, repair, and restraint and that's what I'm focused on.
SPEERS:
What do you think about the Financial Review reported yesterday that the Governor attended a private lunch with bank traders, commercial bank traders on Thursday, and during the lunch we saw some movement in bond prices. Are you concerned about that?
CHALMERS:
Look, the Governor operates independently from the government. I don't clear his commitments that he makes in his diary, I suspect that governors before Governor Lowe have met with different players in the market. If people have got particular concerns, they've got an opportunity to raise them directly with Governor Lowe and he can explain.
SPEERS:
You're not asking questions of the Reserve Bank about that one?
CHALMERS:
I think Governor Lowe will be before two Parliamentary committees through the course of the week, no doubt people will want to ask him about that and he can explain it. I think there's a broader issue here about how the bank communicates the context for its decisions. This is one of the things that I've been discussing with the RBA Review panel. I actually discussed it with them on Friday in one of the regular meetings that I had with the review panel ‑ how they communicate their decisions and the context behind their decisions is one of the key focuses of that.
SPEERS:
So how should they communicate decisions?
CHALMERS:
I'll receive the recommendations of the review next month. I've asked for that report to be provided to me on the 31st of March and I commit to responding and releasing it between then and the Budget. So it will be provided to me on the 31st of March, released between then and the Budget and I'll provide an initial response. And one of the things that they will grapple with is the best way for the bank to communicate its decisions and the context for them.
SPEERS:
So that's interesting, you'll get this RBA review the end of March, you will respond to it before the May Budget so we'll know by the Budget whether you intend to reshape the board and whether you intend to stick with Philip Lowe, extend the term of Philip Lowe as Governor?
CHALMERS:
I'll provide an initial response to the RBA Review, I've asked for it on the 31st of March. I will respond in some fashion between then and the Budget. I don't know the magnitude of all the recommendations, but I'll provide a view on it and I'll release it before the Budget. When it comes to Governor Lowe's appointment, we will consider that closer to the middle of the year but obviously the recommendations of the review will be part of that. It's important to remember what the review is and what it isn't. It is an opportunity to think about the best structures and processes and objectives of the Reserve Bank going forward. It isn't about one person or about one decision or even one set of decisions, it's about how we take the bank forward into the future. The decision about the Reserve Bank Governor will be similar and it will be taken closer to the middle of the year in consultation with the Prime Minister and our Cabinet colleagues.
SPEERS:
Just while we're on big reviews, Treasurer, the Productivity Commission is due to hand you their big five‑yearly review of, presumably looking at what to do about lackluster productivity in Australia lately. Have you got that review yet?
CHALMERS:
I received it in the course of last week, David, and I've started going through it. It's important to remember that this review that I've been provided by the Productivity Commission and these recommendations, it is almost 1,000 pages in length. It's nine volumes. There are more than 70 recommendations which go right across governments. And so what I will do now is I will go through it, I'll consult my colleagues. What I intend to do is to release it in the course of March if I can. I'm not obligated to release it until the end of May under the legislation but I'd like to do that sooner, ideally in [March] so that we can have this national debate about our productivity performance and some of the recommendations in there. Now, inevitably, a government won't pick up and run with every single one of the recommendations from the Productivity Commission but there may be some that we can run with. There will be some that align with the government's economic plan and our policy objectives. But at the very least, if it kickstarts a proper conversation about how we boost productivity by investing in our people and making it easier for people to adapt and adopt technology, and an economy increasingly powered by cleaner and cheaper, more reliable energy then that will be a good thing.
SPEERS:
We look forward to seeing some of those big ideas and what you're going to do with them. Let's turn to the Budget in May, soaring commodity prices are going to give you at least a temporary windfall. Is there any chance you'll actually post a surplus this year?
CHALMERS:
We're not expecting to, David. In fact, we're not expecting a surplus in any of the four forward years, currently. We will get a short‑term boost to revenue, but we don't currently expect it to be like the one that we got in October. Obviously, commodity prices are helping, wages growth is helping, low unemployment is helping, but the dollar has appreciated as well, and that cuts across things too. So we're not currently expecting a surplus in any of the four forward years, we are expecting a near‑term improvement. But some of the pressures on the Budget, in the later years of the forward estimates and into the medium‑term are actually intensifying, rather than easing.
SPEERS:
I want to get to that. With this windfall, I assume you're going to bank that, you're going to ignore calls to spend any of it?
CHALMERS:
We'll bank most of it. We haven't decided yet on every element of the Budget, and so I'm not going to pre‑empt that. Our predecessors spent most of it, we will save most of it. We actually saved 99 per cent of it over two years in the October Budget and 92 per cent over the forward estimates. What we'll do this time ‑ every budget is obviously a series of fine judgements and a series of balances we need to strike ‑ we'll focus on that cost‑of‑living relief, we'll focus on growing the economy and fixing our supply chains. But we will put a premium on restraint, and we will try and bank most of the temporary revenue upgrade we get from higher commodity prices.
SPEERS:
Your October Budget did however, have a net increase in spending. What about this May Budget? Will we see a net increase or a net reduction in spending?
CHALMERS:
We haven't finished the Budget yet, David, as you'd expect we're in the middle of February and the Budget is in the second week of May. So there's a lot of work to be done to finalise the Budget. The magnitude of the spending matters, obviously, but the timing of the spending and the nature of the spending matters too. And so you picked up the October Budget ‑ in October, we made a big investment in early childhood education and that is a spend but it will have a big economic dividend that will make our workforce bigger. And it will provide cost‑of‑living relief without adding to inflation, and so the nature of the spending matters too.
SPEERS:
A couple of things. Let me ask you about the stage three tax cuts, they're due to kick in next year. Your last estimate was that these would cost $254 billion over 10 years, will the price tag now be even higher?
CHALMERS:
I haven't got a new number for you on that, David. We expect the number to be bigger, obviously, because there's another year in the forward estimates and another year in the 10 year horizon. Wages have been a bit stronger and unemployment has been a bit lower, and all of these things will matter when we update the various parameters. But obviously, the number will be bigger than it was in October.
SPEERS:
The Reserve Bank is saying inflation will still be higher than it needs to be through next year, it won't get back down to their two to three per cent target zone until mid‑2025. So when these stage three tax cuts come in next year, will they add to inflation?
CHALMERS:
It remains to be seen what conditions we have there. Obviously we've got those forecasts but forecasts are notoriously difficult at the best of times and these are unpredictable times ‑ I think we need to recognise that. We're seeing the beginnings of wages growth, we're expecting inflation to moderate, how those two things play out over the course of the next couple of years remains to be seen.
SPEERS:
But the Reserve Bank reckons it'll still be above its target zone next year. Wouldn't it be better, wiser to at least delay these big stage three tax cuts until inflation is under control? Otherwise, you're just going to hurt mortgage holders, aren't you?
CHALMERS:
As you know, David, we haven't changed our position on those states three tax cuts, and as you identify in your question, they don't come in for more than a year now. And so a decision on those tax cuts of either nature wouldn't actually impact on the inflation challenge that's in our economy right now, which is our major focus and that's why we've got that three point plan when it comes to relief repair and restraint.
SPEERS:
But closer to the time, closer to July next year, you might have a look at the inflation figure and have another look at whether it's the best time to lob in those stage three tax cuts to the economy?
CHALMERS:
We haven't changed our position, David, obviously, every Budget, the task for every Budget is to balance the Government's priorities and the pressures in the economy. This Budget is different to the October Budget in a sense that we're on the other side, ideally, of the inflation peak, the economy is slowing because of higher rates, and a global downturn, and so we balance all of that as well. But there will still be a premium on restraint, there will still be a premium on cost‑of‑living relief and on trying to deal with some of these issues in our supply chain which have made us more vulnerable to these pressures coming at us from around the world.
SPEERS:
Just a final one, Treasurer, on wages ‑ you mentioned those a few times ‑ the Reserve Bank is warning pretty clearly now that wage growth is picking up. It's paying close attention to this, it says. It even says it's important to avoid a price wage spiral. Do you agree there's a risk of a price wage spiral?
CHALMERS:
We don't have an inflation problem in this economy because wages are too high, wages have been stagnant for the best part of a decade because of our predecessors' deliberate approach.
SPEERS:
The Reserve Bank's worried about this.
CHALMERS:
The Reserve Bank and the Treasury and others ‑ all the credible economic commentators ‑ know that we've got inflation in our economy because of global conditions combined with weaknesses in our supply chains and weaknesses in our energy market. That's very clear. I think it's very, very important that we get wages growing strongly and sustainably in our economy. So we're really pleased that we've seen the beginnings of that already. That is not the reason why we have this inflation.
SPEERS:
So the Reserve Bank shouldn't be worried about a price wage spiral?
CHALMERS:
I'm not worried about it because I think it's an important thing that we need to do in our economy to get wages growing again, in a strong and sustainable and responsible way. We deal with inflation by providing cost‑of‑living relief, dealing with the supply chain issues and showing restraint in the Budget.
SPEERS:
Treasurer Jim Chalmers, thanks so much for joining us.
CHALMERS:
Thanks, David.
