AARON PATRICK: Why Jim Chalmers’ failure to control inflation is world class

Speaking with sadness rather than anger, Treasurer Jim Chalmers on Wednesday told Australians they are paying a hefty price for a war started by others.

He left out an awkward truth: Australian inflation leads the world.

The 4.6 per cent inflation figure for the year ended to March 31 was the fourth highest of 22 large economies, behind Argentina, Turkey and Russia, according to Trading Economics, an online database.

Wednesday’s inflation figure includes the first hit from the oil shock triggered by the war in Iran. The second-order effects, from fertiliser to toilets, will emerge when the April figures are published on May 27.

In the meantime, Dr Chalmers is shifting blame elsewhere. “It’s another reminder that from an economic point of view, an enduring end to the war can’t come soon enough,” he said said.

While almost everyone agrees, independent economist Warren Hogan points out there was a “pre-existing condition” — inflation was accelerating before bombs began to fall on Tehran, leaving the economy in a dangerous position if a challenge appeared. Which it did.

“We are more vulnerable to this shock than just about any country in the world apart from those directly affected,” Mr Hogan said.

Spending spree

Across the region, Australia’s stands out for its failure to contain inflation, which erodes savings, pushes up interest rates and drives investments into unproductive assets such as gold.

China, Japan, South Korea and Singapore reported moderate inflation in March. Even Indonesia got inflation into its central bank’s target zone this month.

Why is Australia’s prices performance so bad? One of the main reasons, which has been identified by credible, mainstream economists, is the Albanese government has gone on a spending spree.

Since elected in 2022, the Labor government has increased spending by $110 billion, according to the Budget papers. The money is part of a historic increase in welfare and subsidies for nursery staff, university students, would-be tradesmen, nurses, doctors, first-home buyers, manufacturing workers and other voters favoured by the Labor Party.

The splurge was a form of “pro-cyclical” stimulus, which means it added to an over-heating economy rather than slowing it down.

Dr Chalmers pretends the opposite. On Wednesday, in a press release, he said the Budget was stronger “because we have found $114 billion in savings and reprioritisations”. He didn’t repeat the claim at a press conference in Brisbane, perhaps wary of being challenged over what may be the greatest lie of his treasurership.

As Finance Minister Katy Gallagher admitted at an unintentionally humorous Senate committee hearing, there were no $114 billion in “savings”, or spending cuts. Labor switched most of the money to different programs.

One of the top Budget analysts, economist Chris Richardson, described the savings claim as a strategy of “fake it until you make it believed”. He urged readers to consult their “BS detector” if they see “savings and reprioritisations” in the Budget on May 12.

No middle ground

Having left the economy vulnerable, Dr Chalmers blamed March’s inflation acceleration on fuel prices, which have been driven up by the higher cost of oil. It was a convenient deflection.

Fuel was the biggest contributor, but not the only one. Electricity, property, rents, healthcare and restaurant meals contributed too. Clearly foreign and domestic price pressures are combining into malevolent force that is out of control.

Unless the government contributes by cutting spending, the inflation fight may be left to the Reserve Bank of Australia, which relies on the blunt economic instrument of interest rates. The consequences for anyone with debt, and some without, will be unpleasant.

Dr Chalmers, in his wonderfully understated but authoritative style, promised spending cuts in two weeks’ time. “The Budget will have more savings in it,” he said. “It will have more spending restraint in it.”

If the Budget increases spending beyond inflation, Australians will be entitled to ask: when will the BS stop?

In the meantime, the Reserve Bank must decide next week whether to raise interest rates.

In a conventional situation, a rate rise would be the obvious response to the prices breakout. This case is complicated by the oil price jump, which has imposed what might be called a shadow rate rise on the economy because it is hard to avoid.

Either way, there is no middle ground, as economist Stephen Koukoulas pointed out. The central bank must choose between tackling inflation or keeping unemployment low.

One man should take primary responsibility for this horrible choice: Jim Chalmers.