Treasurer Jim Chalmers on the 'spiky' parts of Australia's inflation problem

New treasurer Jim Chalmers has been in multiple briefings since Sunday, and the message he sends in this podcast is that he is not going to try to gild the economic lily with the Australian community.

He intends to deliver a “pretty blunt, pretty frank” assessment of Australia’s challenges in an economic statement to parliament soon after it returns in June or July.

Chalmers highlights two particularly “spiky” bits of Australia’s inflation problem that are under “extreme pressure” at the moment – power prices and the building industry as the cost of materials rise.

Ahead of his first budget planned for October, Chalmers reaffirms he is “highly unlikely” to be able to renew the temporary six-month cut in petrol excise when it expires in September.

If there was “more we can responsibly do, we will”, but people shouldn’t assume that the cost of living relief in the March budget will continue forever.

Meanwhile Chalmers and finance minister Katy Gallagher are already combing through the numbers to get savings from areas they identify as wasteful spending.

He also speaks about the employment summit planned for early in Labor’s term – which he wants to have a “broad focus” – and cautions against assuming the unemployment rate (at present 3.9%) will be “on a kind of a permanent downward trajectory” given rising interest rates and international uncertainly.

He raises the prospect of changes to the Reserve Bank’s mandate which at present encompasses full employment and price stability, saying that would a matter for an inquiry he promised in opposition and will shortly set up.

TRANSCRIPT

MICHELLE GRATTAN, HOST: Jim Chalmers, in the hours of briefings you’ve received, what’s been the most surprising thing you’ve learned, something that you hadn’t realised or hadn’t so much appreciated before?

JIM CHALMERS, TREASURER: I think a lot of it has been unsurprising. We’ve got a problem with inflation in this economy that we’re inheriting, and that’s why we’re going to have more interest rate rises according to the Reserve Bank. We’ve got real wages falling and we’ve got a trillion dollars of debt with not enough to show for it. On the specifics of the briefing - and I’ve been sitting with Treasury really since Sunday, in these rolling briefings - and I think that there are two particularly spiky parts of the inflation problem, which are very pressing. Power prices are spiking - which is going to put extra pressure on Australians - and there are acute pressures on our building industry because in lots of instances they signed contracts twelve or eighteen months ago and then we’ve had this spike in inflation under the former Government, which has impacted on building materials and the like, which has put them under extreme pressure. So, the broad contours of the challenge are familiar to me, but there are very specific, very pressing problems that we’ve inherited as well.

GRATTAN: Well, just going to those problems that you named, what can be done or how will you approach them?

CHALMERS: I think our responsibility is to recognise that the challenges are so serious in our economy that we’ve inherited - and not just as a consequence of COVID but in many instances, for example, in wages - as a consequence of what I see as almost a decade of economic mismanagement, is that we have to work out where we can meaningfully make a difference. One of the reasons why Katy Gallagher and I have said we’ll hand down a Budget in October, rather than wait for May, is because we’ve got to make sure the Budget is reoriented away from political spending towards spending where we get an economic dividend. That’s our responsibility and that’s our mission, really. So, we’ve already begun going through the Budget line by line to see where we can improve the quality of spending, we can take money that might have been rorted or wasted in the past and invest it in good economic outcomes: cleaner and cheaper energy, better child care and aged care, investing in advanced manufacturing, getting real wages moving again. That hard work has already begun. You’ll see the fruits of that in the October Budget.

GRATTAN: Just taking power prices though, and looking at the shorter term, rather than the longer term, I know you’ve got investment plans and so on, but what can you do in the immediate term?

CHALMERS: In the last Budget, the Government and the Opposition agreed on a package of cost‑of‑living relief, as you know, which in most cases runs out later in the year, but that is an important part of providing some relief at least in the near term from these cost of living pressures. We need to remember as well that the Reserve Bank and the Treasury have said that this inflation problem that we’ve inherited from the Liberals is going to get worse before it gets better. There’s some near-term support in the economy, and that’s important for people to deal with these challenges. What we’ve tried to focus on is what happens after that support runs out? What responsible, sustainable, enduring cost of living relief can we build in from our economic policies and plans? That’s why our Powering Australia Plan - which is more important in the context of spiking energy costs - is about improving cleaner and cheaper energy into the system, so that we can get those power bills down. Our child care policy, which kicks in next year, is all about getting those bills down substantially. Our cheaper medicines plan is all about getting medicine costs down next year. These sorts of things will make a meaningful difference when the current cost of living relief runs out.

GRATTAN: Won’t you have to deal with some interim relief after this six months’ relief that the former Government gave, or will you let that pass?

CHALMERS: We’ve got to be upfront about it. We will always do the best that we can in the context of these pretty severe Budget constraints that we’re inheriting. When you inherit a trillion dollars in debt, then you have to be upfront with people and say: “We can’t do everything that we would like to do. There’s not room in a Budget heaving with that much debt for even all of the good ideas.” So you need to weigh up your priorities. What I’ve tried to do – and I want to engage the Australian people in a big national conversation about our economic challenges, because I think people do appreciate you can’t do everything as a Government; you need to be realistic and responsible and that’s what we intend to be. And so, when some of that relief runs out, it won’t be possible in a Budget heaving with that much debt, to extend some of those measures forever. I said that before the election, and I say that again after the election. We will work with people responsibly to see what relief we can continue to provide.

GRATTAN: So there will be no extension to the petrol excise cut?

CHALMERS: It’s highly unlikely to see that extended. We said that before the election. We were upfront about it. And after the election…

GRATTAN: That’s still your position?

CHALMERS: …that’s still our position. We will be handing down a Budget in October. If there’s more that we can responsibly do, we will, but people shouldn’t assume that the cost of living relief that was in the Budget earlier in the year will continue forever.

GRATTAN: Now, you’ve talked a lot about the need for real wages growth. How can you get wages growth up?

CHALMERS: I think the most important place to start is to get a good outcome out of the Fair Work Commission for the lowest paid workers. We’re talking here in many cases about the heroes of the pandemic making $20.33 an hour during a cost of living crisis, which is obviously not acceptable to us and we said a lot about that during the election campaign. A great place to start if you want to get real wages moving again…

GRATTAN: Just on that, there was a lot of talk about whether you put that 5.1 per cent inflation rise into the submission, as to what you wanted. Will you actually have a number in that submission and when will that new submission go in?

CHALMERS: Yes, so it’s important to understand that the process is already well underway. They received submissions before the election. Clearly, there’s an opportunity for a new Government to submit another submission, and I will be talking with Tony Burke and Anthony Albanese about the best way to do that. But our view is already incredibly clear. There’s nobody at the Fair Work Commission who hasn’t heard that our position is that we want to see low-wage workers keep up with the skyrocketing cost of living. That’s a good place to start. We’ve got broader plans on real wages. The best way to get real wages growing is to train people for higher wage opportunities, is to make it easier for parents to work more and earn more if they want to, and to invest in industries where there are secure, well‑paid jobs, like advanced manufacturing and the care economy and the like. If you do all of those things, you do give yourself a chance to get real wages growing again.

GRATTAN: Well, what about leading by example? The wage growth in the public sector has fallen behind the wage growth in the private sector. What about a wage rise for public servants?

CHALMERS: Katy Gallagher is obviously the responsible Minister there. She’s the Minister for Public Service as well as the Minister for Finance and so I don’t want to kind of pre-empt any considerations or conversations that Katy might be having. My priority is in the economy more broadly in the ways that I’ve just described. I think real wages falling in the way that they have been is, in many ways, the defining challenge in the economy because it combines this high and rising inflation during this cost of living crisis, with the fact that people are falling further and further behind. It’s not good economic management if people can’t put food on the table and get ahead. If I think about what I’ve inherited from Josh Frydenberg, a lot of people focus on the trillion dollars in debt, which is very important. A lot of people focus on inflation, very important. But where it all comes together and where our choices are constrained, is when it comes to people falling further and further behind. We want the national economy to grow, but we want people to actually have a slice of the action as it does.

GRATTAN: Labor has promised a jobs summit as one of its first acts. Now, what will this do and will this be one of those sorts of quick and dirty summits that everybody comes, talks for an afternoon and that’s it, or will it be more like the Hawke Summit of 1983 when, in fact, people were here for nearly a week, I think, maybe a whole week, and there was a lot of pretty serious debate?

CHALMERS: We want it to be a serious discussion. I think there’s a really substantial appetite in the Australian community - certainly in the business community, the unions, the community sector, employers and employees, and businesses of all sizes - there’s genuinely an appetite for us to get together and work out where the common ground is. I thought – the thing that really fired me up about Anthony Albanese’s victory speech on Saturday night - is when he talked about the common ground where we plant our aspirations together, and that’s what the Summit would be about. We also need to understand that even with the unemployment rate having fallen in welcome ways, there’s still challenges around skill shortages, real wages, the gender pay gap. There’s a whole range of challenges in our labour market, which we’ll only solve if we work together. I think Anthony is uniquely placed to provide that kind of leadership. He is by nature an inclusive person. He’s an empowering person. You see that in the way that he treats us in his own team. We want to tap that spirit, we want to tap that appetite around Australia, see what we can agree and work out together. The logistics of the Summit will be worked out in due course, and we’ll have more to say about it, but that’s the spirit that we want to capture.

GRATTAN: But it would be a summit of more than one day?

CHALMERS: I’m not sure, to be honest Michelle. Those details haven’t been worked out. We know what we want from it, and we’ll work backwards from that.

GRATTAN: What you want is a set of ideas across the economy or a more narrow focus?

CHALMERS: We want a broad focus because, as I said, I think too often people think that the unemployment rate tells the full story of the labour market, and it just doesn’t. You want it as low as possible, you welcome it when it falls, but you want people to understand that there’s a lot of issues at play in the labour market. We’ve had a lot of job insecurity. We’ve got the wages share hasn’t kept up. We’ve had a whole bunch of issues around gender pay. So, ideally, given people’s interest and appetite to work together, ideally, it would have a relatively broad agenda.

GRATTAN: We’ll come back to the labour market, but just on this question of inflation - how high do you think it will go? Do you think that the estimates that we’ve heard earlier need to be updated or are being updated?

CHALMERS: Both the Reserve Bank and the Treasury have substantially lifted their expectations for inflation and both of those institutions think that inflation will get worse before it gets better, because it’s on a trajectory that can’t easily be turned around. So, even between the Budget only a couple of months ago and the Pre‑Election Outlook the expectations for inflation have changed substantially. Inflation is high and rising. The Reserve Bank has said publicly there will be more interest rate rises. We are already on that trajectory throughout the course of this year, and so the inflation problem was getting worse, not better, when the Government changed hands.

GRATTAN: Are those estimates still changing or not?

CHALMERS: Well, they don’t get updated, you know, kind of weekly, but clearly…

GRATTAN: Only for a new Government.

CHALMERS: Clearly, people’s expectations are inflation has been getting worse not better. But what I would like to do, what I intend to do, is to deliver a pretty detailed economic statement to the parliament when it returns. Whether that’s in June or July, that’s not clear yet, but I want to give a pretty blunt, pretty frank assessment of our economic challenges to the parliament as part of bringing the nation into our confidence about these challenges and inflation is a huge part of that story. Obviously, in the usual way, the forecast will be updated in October.

GRATTAN: So, as things stand though, we’re headed to inflation of, I think, it was more than six per cent; is that right?

CHALMERS: That’s what the Reserve Bank and the Treasury have been saying publicly, and if that needs to be updated, it will be.

GRATTAN: In terms of the October Budget, what sort of things can we expect from that?

CHALMERS: I think, most importantly, the October Budget will do two main things. It will implement our commitments because they’re important to securing the recovery and trying to grow the economy without adding to inflation and getting real wages moving again. So, that’s a big part of the story. But we have already begun going through the Budget line by line to see where we can redirect that unproductive, wasteful spending into areas where we get an economic dividend. We’ve begun that work. Katy has with Finance, and I have with Treasury, already, and so ideally, the October Budget will see the fruits of some of that work.

GRATTAN: It sounds sort of benign, I must say, when you say, “Well, we’re going to get rid of all the rorts and we’re just going to have fewer contractors and so on”, but for meaningful reviews of spending, aren’t you going to have to really go much deeper than that? Aren’t there going to be some nasties in that Budget?

CHALMERS: Well, I wouldn’t necessarily describe it like that. But clearly, if we find opportunities to trim spending where we’re not getting an economic dividend for the Australian people, then we will grab those. Because you can’t ignore the fact that for the first time in the history of this country, an incoming Government is inheriting a trillion dollars of debt, so we take that challenge seriously. Katy Gallagher and I released, in Parliament House during the election campaign , $11.5 billion in Budget improvements – a combination of trimming spending, a combination of unwinding reports and waste, and a combination of multinational tax reform – and that does not have a lot of attention Michelle, but $11.5 billion is a pretty decent start.

GRATTAN: Yes, but what’s the deficit?

CHALMERS: Yes, but it’s a pretty decent start. You have to begin somewhere. We need to be upfront with all of your listeners and say nobody can flick a switch and make a trillion dollars of debt disappear, but you have to start. You have to take the challenge seriously and that’s what we’re doing.

GRATTAN: Might you begin, for example, with the National Party’s dams. They secured some $6 billion for the dams in the election. Is this the sort of thing you’d look at or would you want some supporting analysis for the benefit of that spending?

CHALMERS: Obviously, the cost–benefit analysis and the business case is really important. Take Hells Gate Dam, for example, in North Queensland. We have said that you could save about $500 million if you take the time to do the business case properly, and that means starting a year later. So that’s a good example of the type of thing that you’re talking about. We want to build infrastructure in the regions. If we want the national economy to recover strongly, the regions need to be a big part of the story, but that means getting maximum bang for buck for these investments. Clearly, part of our task is to make sure that we are getting an economic dividend not just a political dividend for the National Party, which has been the approach for too long.

GRATTAN: Now, one of your meetings today, I think, will be with the Reserve Bank Governor; is that right? And you’ve promised an inquiry into the way the bank has been doing its job. What do you want to get out of that inquiry?

CHALMERS: Roday I will be meeting with the Reserve Bank Governor, but also the heads of all the major regulators - including the Energy Regulator, APRA and ASIC - and I will be meeting with them in Canberra today. I’ve known and worked with Governor Lowe for some time, and I want to engage him in a conversation about this Reserve Bank review. I want to do it in a collaborative way. I’m not interested in people taking shots at the Governor or at the Bank, I’m interested in making sure that we get the monetary policy regime right and that it interacts with Government policy effectively. So I will be talking with Governor Lowe about that. I’ve had a handful of conversations with him about it already and before too long we hope to be able to set the parameters of that review. It’s really important, there hasn’t been a review like that for some time. We’ve had this remarkable period in our economy. We’ve had historically low interest rates that are rising now, and so we want to have a look at the regime and make sure it’s fit for purpose and it’s delivering what we need it to for the Australian people.

GRATTAN: Well, it’s certainly struggled with its forecasts recently, hasn’t it? Is the entire way that it’s run up for grabs? For example, would you want to see more economists on the board?

CHALMERS: We’ll settle the terms of reference before too long, and clearly those sorts of issues will be part of the conversation, but how specific we want to be with that we’ll have more to say about it at a later stage. The composition of the Board is important, but also the making sure that the targets are appropriate, the objectives are appropriate, the intersection between monetary policy and fiscal policy is appropriate. So that may be a consideration, but it will be much broader than that.

GRATTAN: Coming back to the labour market, are you committed to driving unemployment down further? It’s now got a three in front of it. Is it indeed possible to get it much further down?

CHALMERS: Well, it remains to be seen. Obviously, we want to drive unemployment as low as we can, but we also want to deal with long‑term unemployment, we want to deal with some of those other issues we’ve already talked about - wages, gender, job insecurity - and we’ve got some plans around all of that. We want the unemployment rate as low as it can be. It may be that it bounces around a little bit as interest rates rise. We shouldn’t assume that it’s on a permanent downward trajectory. We’ve got rising interest rates, we’ve got these big challenges with inflation, we’ve got some international uncertainty as well. So we need to be realistic about all of that. But if we can get unemployment down as low as possible that’s a good thing, and we want to satisfy those other economic objectives too.

GRATTAN: Employers are obviously screaming about the difficulty of getting workers. What do you see as the answer to that apart from your agenda to improve skills, which again will take a while?

CHALMERS: Yeah.

GRATTAN: What about the here and now?

CHALMERS: Well, skills are the most important part of it. We’ve got a big commitment there on fee‑free TAFE, whether it’s skill shortages, but I think that’s the most important part.

GRATTAN: That doesn’t help the man with the coffee shop.

CHALMERS: Understood. I think child care is a big part of this story. We’ve actually got this enormous pool of untapped workers who are discouraged from working more because it costs so much to put kids into child care. I know from personal experience what the childcare system is like, and for too many families they’re priced out of it. For too many families it doesn’t make sense to work more because the extra money you earn just goes into child care. So that’s one of the primary reasons we see child care reform not as social security but as a key economic reform to boost participation, in the economic jargon, which really just means we want to make it easier for people. If they want to work more and earn more, we want to make it worth their while, and that will make a difference to skills shortages and labour shortages. Clearly, migration is part of the story. Clearly, there’s a lot of good ideas floating around about how we get older workers back into work, part‑time perhaps. So it will take a combination of all of those things, but I genuinely believe that training and child care are two of the most important planks. I feel like too often child care is kind of dismissed as some kind of non-economic thing. Obviously, it eases cost‑of‑living pressures. Obviously, it’s good for kids to have them in the early education system. Parents notice the difference in social skills, in counting and reading and all the rest of it, it gives them a head-start as they head into kindy or preschool. That’s all part of it. But it’s a hard‑edged, hard‑headed key economic reform so that businesses can find more workers as well.

GRATTAN: Of course, there’s also the argument that if you have families, both parents, working too much, you create other problems, don’t you? This whole family–work balance doesn’t operate very well.

CHALMERS: Obviously that’s a challenge and we want families to be able to choose subject to their own circumstances. That’s what it’s really about. We don’t want child care to be so expensive that people have no choice. We want them to be able to choose what’s best for them. And I think we learned a lot about working family and home responsibilities during the pandemic, during the lockdowns; and during this kind of hybrid economy, where people are doing a combination of working from home and going to work. We learned a lot about what we really value. Superficially, we think it wasn’t bad a couple of days a week if you could to kind of work on Zoom, wandering around in trackie daks around your house and all the rest of it. But the big benefit of it was you get to spend more time with your kids. So, I think every family, in one way or another, is kind of weighing up: what’s the best version of this for our own circumstances? And what we would like to do is give people a broader array of choices by making it easier for them if they want to work more and earn more, to make the child care system more conducive to that.

GRATTAN: Just finally, on this question of immigration, it does seem that in recent months both sides of politics have been a bit wary, a bit coy, about talking about what sort of immigration levels are most desirable. We had, before the pandemic, obviously, unease about very high

immigration in some circles at least. Now we desperately need more immigrants. What’s your view of this and how do you go about scaling up immigration without putting too much pressure on other things like housing, for example?

CHALMERS: Yeah, those are the considerations we need to balance. One of the tragedies, frankly, of losing Kristina Keneally from our team , was she was doing a heap of work on – and all of us were doing a heap of work on - how do we make sure that as the migration system gets up and running again after it was closed down - effectively for a couple of years - how do we make sure that it’s the best version of the system, the best version between temporary and permanent, the best balance between skilled and unskilled, the best balance between all the family reunion and all the rest of it, so that we’re getting the best outcomes for our people and for our country? Now, I am personally a huge believer in migration.

GRATTAN: “Big Australia” man?

CHALMERS: Nobody uses those terms, but I know from my own community, migration strengthens our society, but also as someone involved in the economy, how it strengthens our economy. But we need to make it right and we need to make sure that we’ve got the settings perfectly right. I talk to business a lot and what I say to them privately and what I’m happy to say to all of your listeners, is that obviously there is a role for skilled migration, but it should never be a substitute for training. We shouldn’t have this kind of false binary between you either choosing migration or you choosing training. Obviously, it’s a combination of those two things, in addition to child care and some of these other issues we’ve talked about. That’s how we get the right mix of workers in the economy. We want to be responsible and reasonable about that. We were having discussions with the business community before the election and we will after the election as well, but migration will play a role.

GRATTAN: Jim Chalmers, thank you very much for being our first Minister in the new Government to talk with our podcast. And thank you to my producer Ellen Duffy. We will be back with another interview soon, but that’s all for now.