Keeping the economic sun shining amid mounting global tensions and inflation while not blowing the budget will be a difficult challenge for the Albanese government. During Australia last election campaign, the Coalition’s spoof attack commercial against the Labor party sung, “There’s a hole in your budget, dear Labor.”

However, the intended attack of center-left Labor’s economic credentials failed to resonate with voters, despite the fact that the center-right Coalition government recently oversaw a massive increase in public debt, including more than A$300 billion in coronavirus pandemic expenditure.

With Labor gaining a legislative majority in the May 21 election, will the party be able to deliver on its promised “stronger and more inclusive” Tertiary sector of the economy in the face of rising prices, trade woes, and global turmoil?

Labor’s five-point economic plan and budget strategy emphasised “smart, focused investments,” boosting “quality of expenditure,” and cutting consultant spending while closing tax loopholes for multinational corporations. It was a “small target” strategy in comparison to the main policy agenda that saw the party defeated in the 2019 election.
Despite this, Jim Chalmers, the nation’s new federal treasurer, has rapidly laid the stage for worse times ahead for the world’s 13th biggest economy.
Chalmers said he inherited a “dire” position from the previous Coalition government led by Scott Morrison, speaking after the latest GDP figures showed the economy growing at the seemingly solid annual rate of 3.3 percent.

“There are components of robust demand, [a] tight labour market, and some appealing features of the national accounts,” Chalmers said during a news briefing.

“The scenario we inherited is dire. In certain cases, the situation is severe.”

Chalmers cited inflation, declining real wages, rising interest rates, and rising cost of living pressures as “major concerns.” Inflation has risen to 5.1 percent, the highest level since 2001, with home power bills rising due to increased energy prices and gasoline expenditures.

Unemployment has fallen to 3.9 percent, a 48-year low, but labour and material shortages caused by the COVID-19 pandemic have resulted in mounting cost pressures.

The Reserve Bank of Australia (RBA) raised its official cash rate to 0.35 percent on May 3 in response to increasing inflation, the first official interest rate increase since November 2010. The RBA was widely expected to raise interest rates by 0.25 percentage point at its June 7 meeting, with several analysts predicting as high as 0.4 percentage point. In the end, the bank outperformed even the most optimistic forecasts with a 0.5-point increase, the most in 22 years.

RBA Governor Philip Lowe made the announcement in a statement. The Board’s decision was based on “current inflation pressures in the Tertiary sector of the economy and the remaining extremely low level of interest rates.”

“The Board intends to take more measures in the process of normalising monetary conditions in Australia in the coming months,” Lowe said.

According to the Coalition government’s pre-election budget, total debt would peak at A$1.2 trillion, or 45 percent of GDP, up from roughly 28 percent before the epidemic. Adding borrowings by state governments, however, could bring overall government debt to about 65 percent of GDP.

Labor’s election campaign pledges might exacerbate the country’s budgetary situation, with the party committing up to A$15 billion more in social services over four years, including aged care, childcare, healthcare, and the National Disability Insurance Scheme.

Another A$50 billion in “off-budget” investments cited by the party included A$10 billion for social housing, A$20 billion for the energy infrastructure, and A$15 billion for manufacturing.

Analysts have cautioned that if such pledges come true, the country’s cherished “triple-A” credit rating might be jeopardised.

“Talking about the A$40 billion to $50 billion, if it was all spent in the next couple of years and we saw a significantly slower decrease in deficits than we expected, that might put pressure on the AAA [credit rating],” Standard & Poor’s analyst Anthony Walker told the Australia daily.

Australian is now one of just nine countries with a triple-A rating from the three major rating agencies, Standard & Poor’s, Moody’s, and Fitch. Any change in this status might result in greater borrowing costs for the government and private enterprises, raising production the cost of debt in an environment of rising interest rates.

Walker predicted that government deficits will “reduce dramatically” in fiscal 2023, citing the incoming treasurer’s tight budget in October.

“Reasonably Sound”

Can Chalmers surprise the budget?

Chalmers appears “pretty rational,” according to former Treasury advisor Gene Tunny, considering his past as a senior member of former Treasurer Wayne Swan’s staff.

“I’m quite relieved that Chalmers is both intelligent and reasonable,” he told The Diplomat.

“He was Wayne Swan’s deputy chief of staff, and he’s in the correct section of the Labor party, so I don’t believe we’ll see anything radical from him, and there are some other sensible voices in Labor as well.”

Tunny, principal of Adept Economics, believes the new administration will have little impact on the Tertiary sector of the economy.

“Because the administration has a legislative majority, it will not have to make concessions to the Greens or ‘Teals’ [newly elected independent, climate activist parliamentarians], such as an aggressive reaction to climate change,” he explained.

“They’ll run larger deficits than the [previous] administration, but it was already running substantial deficits, so we’re not talking about significant rises in relative terms.”

“However, the new deficits will put further pressure on inflation and interest rates, although not significantly more than the existing big structural deficit.”

“On structural reform, they won’t do anything on IR [industrial relations] reform, which the business community has been clamouring for,” Tunny continued. They do consider childcare reform as a legitimate reform; they have a more generous subsidy, and the purpose is to attract more women into the workforce, so increasing labour participation, so they will say that is a constructive structural change.” In terms of taxes, I don’t expect to see much changes. [Labor] was burnt in the last election by attempting to make major changes to the tax system.”

A Labor administration, according to Capital Economics, “would undoubtedly maintain fiscal policy looser than the previous Coalition government, placing additional pressure on the RBA to boost interest rates.”

The government budget deficit on the underlying cash balance had averaged 1.6 percent of GDP under Labor since 1970, compared to 0.4 percent under the Coalition.

According to Marcel Thieliant, senior Australia and New Zealand economist at the firm, Labor “will make stronger efforts to decarbonize the economy, [but] the majority of mining production is exported, so this will not have a significant impact on the mining industry.”

Labor wants to reduce greenhouse gas emissions by 43 percent by 2030 compared to 2005, which is higher than the Coalition’s objective of 26 to 28 percent. Domestic coal production is viewed as the most vulnerable, but the recent jump in electricity costs has prompted the government to reconsider the benefits of domestic coal production, even as it seeks to increase renewables output.

While the left-wing Greens have called for a “immediate block on all new coal, oil, and gas projects,” Labor’s parliamentary majority and track record in administration implies that the nation’s resource industry will not be overburdened by additional green regulations.

“Labor will want to seem to be doing something [on emissions] but not harming emission-intensive, trade-exposed companies,” Tunny said.

“There is widespread agreement that we must phase out fossil fuels…but the government would prefer to do it gradually over time.”

Meanwhile, newly elected Prime Minister Anthony Albanese is perceived as having a “less combative tone” toward China than the previous administration, but even this approach may not be enough to settle the trade war with Beijing.

Despite China’s moves to restrict Australia imports of beef, barley, coal, and wine, Capital Economics believes that the lack of available substitutes for Australian iron ore and liquefied natural gas, which account for 80 percent of Australian exports, will cause overall exports to “remain healthy.”

Housing was one policy area where Labor and the Coalition disagreed sharply, with the previous Morrison government promising to enable first-time house purchasers to use their superannuation funds to fund a mortgage deposit. Labor, on the other hand, pledged additional social housing and a strategy of assisting 10,000 Australians each year with an equity contribution of up to 40%.

Both initiatives have the potential to increase demand in a housing market that is already oversupplied. However, the latest data suggests that Australia housing bubble may be coming to an end, with prices dipping countrywide in May for the first time since 2020, as rising interest rates put purchasers off.

Interest rates are projected to rise further, with financial markets pricing in an RBA cash rate of up to 3.7 percent in the long run.

“As a result of very high prices and debt-to-income ratios, the Australian property market is particularly vulnerable to the monetary cycle,” ANZ chief economist Shane Oliver said.

“We foresee a top-to-bottom drop in average home prices of 10 to 15% from mid-year to early 2024 as a result of worsening affordability and rising mortgage rates.”
The government’s decision to approve a 5.1 percent wage increase for “poor paid” workers at the Fair Work Commission may entrench high inflation, despite warnings of stagflation.

Nonetheless, analysts believe that Australia will be able to endure a housing slowdown and higher interest rates due to a lower exchange rate, better population growth, more corporate investment, and ongoing high prices for important commodity exports such as coal.

Despite “some policy reforms, notably in childcare, health, elderly care, housing, and climate change…[these] do not affect the economic outlook in the short term,” Commonwealth Bank economists said.

As it recovers from the COVID-19 epidemic, Australia GDP growth is expected to average 4.1 percent in 2022 and 3 percent in 2023, according to the OECD.

Longer term, the “Lucky Country” confronts slowing productivity growth, high emissions intensity, and growing elderly care, health, and pension costs as the population ages, all while the demographic forecast worsens. Because China accounts for almost 40% of overall exports, any more trade restrictions imposed by Beijing might further constrain exports and GDP growth.

Australia have only hazy recollections of the last severe slump in the 1990s, despite having the developed world’s longest economic growth of 28 years through 2020.

Keeping the economic sun shining amid rising global tensions and inflation, while balancing requests for higher expenditure from freshly minted parliamentarians, will be a difficult test for the new government.

With just a few months before his first budget, and an energy crisis threatening to exacerbate cost-of-living pressures, Chalmers and his colleagues will have little time to enjoy their political honeymoon.