Inflation is back, rate cuts are off the menu, and the Coalition are claiming that Labor’s “spending spree” is to blame.
Liberal staffers even handed out stickers blazoned with “Jimflation” to the Canberra press gallery this week. Tagline: “Chalmers’ creation wrecking the nation”.
In case you’re out of the loop, it’s a portmanteau of the treasurer’s first name, Jim, and inflation.
The shadow treasurer, Ted O’Brien, coined the term in parliament on Tuesday, when he said “Australia’s inflation crisis, otherwise known to many as the ‘Jimflation’ effect, is destroying our national prosperity.”
Later that day in question time, and after the Reserve Bank had held rates and hiked its inflation forecasts for the coming 18 months, O’Brien again blamed the unwelcome uptick in inflation on Labor’s “spending spree”.
Chalmers, naturally, dismissed the accusation.
“If he [O’Brien] wants to say that government spending and government budgets are the decisive factor in interest rate decisions then he needs to explain those three interest rate cuts this year, including two after the March budget,” he said.
Where to even start? Is a big-spending Labor government to blame for the unwelcome return of inflation? Would our mortgage payments be smaller if Chalmers was less profligate?
At a very fundamental level, inflation is caused by too much money chasing too little stuff. And it’s unarguable that the public sector’s role in the economy has expanded substantially since the pandemic and since Labor came to power in 2022.
Commonwealth expenses as a share of GDP is expected to be around 27% over the coming few years, according to the Parliamentary Budget Office. That’s roughly two percentage points above pre-pandemic levels, or about an additional $60bn a year.
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Surely, then, all that extra spending is why inflation is proving so stubborn?
“Strictly speaking, there is an element of truth in it,” said Jonathan Kearns, the chief economist at Challenger and a former top official at the Reserve Bank.
Kearns says public spending has “obviously” added to demand for the past couple of years and has been responsible for “a very large share in the growth of the economy”.
But there are subtleties here that O’Brien is keen to skate over.
“The question is whether we would have tolerated the alternative: having lower demand and lower inflation,” Kearns said.
“GDP per capita has been falling for two years. Would we have been happy with it falling even more? Because if that had been the situation, rates would have been cut further.”
There’s also the thornier question of what spending programs should be cut to alleviate the pressure on inflation, and whether Australians would feel better off or not as a result.
In other words, if Labor is to “blame” for adding demand into the economy that has left inflation higher than it otherwise might have been, it is also to “blame” for delivering overdue pay rises to aged care and childcare workers.
You could also “blame” the government for cutting the price of subscription medicines and boosting bulk billing.
In other words, fiscal rectitude sounds good in the abstract, but is a much harder sell in the specific - as Peter Dutton found in the last election.
Chris Richardson, an independent economist and leading budget expert, weighs in on the “blame game”.
“Was it a factor? For sure. But there’s no simple line of sight from the government spending more to that generating inflation,” Richardson said. “And I’m not sure blame is the right approach.”
Richardson said the government’s bigger role in the economy reflects a new “social compact” in which Australians expect more and better public services, from health, to education, to aged care and child care.
It’s a choice we have collectively made – if one we haven’t yet collectively decided how to pay for.
As for the recent rebound in inflation that has loomed so large over parliament this week, the arguments over who is at fault will become moot if it proves to be a blip on the multi-year path back towards the RBA’s 2.5% target.
For Richardson, there is a bigger point that deserves our politicians’ full attention, which is that “Australians haven’t come to an understanding of poor productivity performance”.
“We’ve had magnificent growth in our living standards over time and we keep expecting this baby’s going to bounce back.”
Richardson said Labor can’t afford to be timid when it comes to economic reform.
“The government has the closest thing to a free hand that we’ve seen in decades. The question is: do they take the chance to do something?”
