Chalmers manages expectations ahead of federal budget

Prior to the release of the federal budget next week, Treasurer Jim Chalmers managed our expectations.

He sees dark clouds on the economic horizon: inflationary pressures, more unemployment, falling living standards, rising interest rates and, if we are not careful, an outright recession.

According to Dr Chalmers, the best strategy to weather the coming storm is “responsible budgeting” – which means limiting government spending to reduce the deficit.

But by all but ruling out substantial changes to Stage Three income tax cuts, the Treasurer appears to be ignoring his own warnings about the need to prepare for a global recession to hit Australian shores full force.

Why deficit reduction might be the solution to our problems is never quite clear. It just seems to be how Labor thinks it can maintain the ever-elusive “confidence” in financial markets.

One of the main fears is that government spending will fuel the inflationary fire, which would only encourage the Reserve Bank to implement more interest rate hikes that hurt mortgage holders.

But we all know, and so do Albanese and Chalmers, that inflation is fueled by supply-side disruptions and widening corporate profit margins.

And while the government can’t do much in the short term against the former, there are ways to restrict the latter – the government just isn’t very interested in that option.

It’s kind of like worrying about someone lighting a cigarette when your house is already on fire – it’s not the right thing to focus on.

One of the main fears is that government spending is fueling the inflationary fire. Photo: Getty

Another concern that economists generally have about government spending is the possibility that government spending and borrowing “crowds out” private investment.

But we are not in a situation of vigorous growth against which public spending would set back.

Indeed, one of the main concerns of our time is that it seems almost impossible to get companies to invest in projects that generate economic growth and real productivity instead of borrowing to finance buyouts. stocks and other self-enrichment programs.

Government spending can be “investment” rather than “consumption”, and in fact it is sorely needed.

Finally, will the international financial markets refuse to finance our deficit? This is a more interesting question. Western government treasuries generally don’t have much difficulty financing deficits.

But there are limits to this, which have been highlighted in recent weeks by the market’s response to the UK government’s attempt to borrow heavily just to provide tax relief to its already wealthy core voters.

These limits could become more pressing in the near future, as coordinated actions by global central banks drive up the cost of public debt.

But while it’s easier to sympathize with Chalmers’ concerns about it, it only makes the government’s reluctance to reconsider Stage Three tax cuts all the more baffling.

To get an idea of ​​the importance of this, some figures are useful. The government has committed to shifting infrastructure priorities while remaining within an existing $10 billion “envelope”.

At the same time, he is leaving a whopping $244 billion package in tax cuts for high earners on the kitchen table.

The combination of exaggerated deficit fears and refusal to reverse a package of tax cuts ordered by the previous government is having the effect of constraining the government’s long-term spending plans in pernicious ways.

The consequences of such self-imposed austerity will become more apparent if the Treasurer’s warnings about headwinds in the global economy materialize and Australia ends up facing its first real recession in over 30 years.

Yes, Australia technically experienced a recession in early 2020 when pandemic lockdown orders shut down much of the economy. But public health concerns meant no one blamed the government for the downturn.

The coalition government and the Reserve Bank have been given considerable policy space to provide all the spending and liquidity needed to keep the economy on life support.

It is hard to see a similar window of political immunity opening up for the Labor government in the event of another recession.

Instead, he will have to act creatively, finding ways to shield Australia’s economy from the worst effects of a recession engineered by the Reserve Bank, in conjunction with central banks around the world.

In this context, making tax cuts for high earners is a serious miscalculation.

The government knows stage three tax cuts are bad policy, but doesn’t want opposition cries of “broken promises” to derail its first term. But after 30 years, politicians may have forgotten that recessions are not kind to incumbent governments.

As it finalizes next week’s budget in what is a rapidly changing global economic situation, the Albanian government is expected to weigh the political risks of abandoning tax cuts with the political risks of entering a recession with much of its anti-recession firepower already spent.

Martijn Konings is Professor of Political Economy and Social Theory at the University of Sydney

Gareth Bryant is a Fellow of the Australian Research Council DECRA at the University of Sydney

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