‘Rate rises do and will hurt’: Treasurer

On Thursday (28 July), the federal Treasurer Dr Jim Chalmers MP gave his inaugural ministerial statement on the economy in the House of Representatives.

Addressing the speaker, Dr Chalmers outlined a range of revisions to the government’s economic forecasts.

While the Treasurer acknowledged that “forecasts are never perfect”, he said that the government’s revised forecasts “better reflect the economic circumstances our new government is now dealing with”.

These include both domestic and global issues, including global high inflation (which this week led the US Federal Reserve to raise interest rates by 75 bps in response to the highest inflation figure recorded in more than 40 years).

Growth

Economic growth is also being revised down from pre-election forecasts.

It’s expected that real gross domestic product grew by 3¾ per cent in 2021–22 and is forecast to grow by 3 per cent in 2022–23 ( down from 3½ per cent). 

“Growth is expected to slow further in 2023–24, at 2 per cent – down from the 2½ per cent previously predicted,” The Treasurer continued, pointing to weaker consumption as higher inflation and higher interest rates take hold.

Unemployment

The unemployment rate is expected to remain low through the latter half of this year before returning to 3¾ per cent by June 2023 and 4 per cent by June 2024, the Treasurer told the lower house.

“At the same time, the forecast for nominal wages growth is being upgraded – from 3¼ per cent to 3¾ per cent – both for this financial year and next financial year,” he said.

“If this eventuates – and I’m careful, cautious and conscious of the history here – it would be the fastest pace of nominal wages growth in about a decade.”

Based on current forecasts, real wages are expected to start growing again in 2023–24.

Inflation 

Touching on inflation, which was this week revealed to have risen to 6.1 per cent in the year to June, Dr Chalmers said that this is now forecast to peak at 7¾ per cent in the December quarter this year.

He said the current expectation is that inflation “will get worse this year, moderate next year, and normalise the year after”.

Treasury expects headline inflation at 5½ per cent by the middle of next year, 3½ per cent by the end of 2023, and 2¾ per cent by the middle of 2024 – back inside the RBA’s target range.

Mortgagors to feel the pain 

The Treasurer summarised that high inflation is primarily, but not exclusively, global and would eventually subside, but “not overnight”.

He highlighted the pain that rising costs and inflation were having on mortgagors, stating: “Left untreated, inflation which is too high for too long undermines living standards and jobs, and wrecks economies.

“But the medicine is also very tough to take – and millions of Australians with a mortgage are feeling that pain right now.

“Rate rises began before the election, they rose by a full per cent across June and July, and the independent Reserve Bank has told us to expect more to come.

“There’s no point pretending these rate rises don’t hurt – they do and they will.

“Every extra dollar Australians have to find to service the mortgage is a dollar that can’t help meet the high costs of other essentials.”

The member for Rankin continued that “governments shouldn’t make it harder for the RBA on the demand side but, more than that, we should be working to address problems on the supply side”.

Despite some rhetoric around how wage increases could feed into a self-reinforcing inflation cycle, Dr Chalmers proffered that “we don’t have an inflation problem because workers are earning too much or because we are in some kind of a wage‑price spiral”.

“Real wages growth over the past decade has averaged just 0.1 per cent a year,” he said.

“In the year to March, real wages fell 2.7 per cent – the worst result in more than two decades.

“And once wages growth data for the June quarter is released in a few weeks, it’s likely this fall will have accelerated, given yesterday’s inflation outcome.

“The wages of Australian workers are not causing this inflation. The fault lies with a decade of wasted opportunities, wrong priorities and wilful neglect – that Australians are all now paying for.

“[T]here is no use tiptoeing around the pressure that people are under.

“You know what we are up against. You see it every day. At the supermarket. In your pay packet. When the electricity bill arrives.

“Nine years of mess can’t be cleaned up in nine weeks – it will take time.”

He outlined that the new government intends to “build a stronger and more resilient economy”, create “cleaner, cheaper, more reliable energy”, and provide “decent wages”.

A full set of fiscal forecasts will reportedly be ready for the October budget.

Only by facing up to these challenges can we transform them into opportunities. And this time of great challenge for our country is also a time of great opportunity. You can read my full Ministerial Statement here: https://t.co/5Qb9PIpKUT #auspol pic.twitter.com/RzvSD3zUbH — Jim Chalmers MP (@JEChalmers) July 28, 2022

[Related: RBA Review will 'refine and reform' rather than revolutionise: Treasurer]