MARK RILEY: Jim Chalmers declared victory too early on inflation and Aussies are paying for Labor’s mistakes

Treasurer Jim Chalmers made a bold statement in March last year that was shaped to inspire confidence in Australia’s economic outlook.

Welcoming a positive set of National Accounts, Chalmers declared: “The Australian economy has turned a corner.”

Two months out from the federal election, it was an obvious attempt to set an optimistic frame for the economic debate.

And it worked.

For a little while.

Headline inflation then was at 2.4 per cent. In the pre-election budget later that month, Treasury would essentially declare that the inflation dragon had been tamed.

It boldly predicted that inflation would be sustainably within the Reserve Bank’s 2-to-3 per cent target range by June.

By September, though, it had burst out above that range and has remained sustainably above it ever since.

It is now at 4 per cent.

The Australian economy has turned another corner.

It is now heading in the wrong direction.

There are many reasons for this. Not all of them are within the government’s control.

But there is a groundswell of opinion within the government’s ranks that it must act on the factors that are within its control, and quickly.

Voters are easily convinced that governments delight in hosing taxpayers’ money up against the wall, spending recklessly in order to protect their hold on power.

One Nation is hammering that theme to great effect. It doesn’t seem to matter that leading economists are warning that Pauline Hanson’s own policies would send inflation into the stratosphere and tank the entire economy.

And it is not just the Albanese government’s natural enemies that are causing it trouble.

NSW Labor Premier Chris Minns is suggesting the federal government should do more to rein in its spending and take pressure off the Reserve Bank over interest rates.

Minns is trying to get on the right side of the argument before he faces his voters in February, not so subtly observing that his government is doing its best to dampen demand by moderating its own spending.

The unspoken extension of that? Why doesn’t the federal government follow his lead.

Chalmers blamed much of the August CPI rise to the impact of the Middle East conflict on petrol prices.

However, the Australian Bureau of Statistics says the single largest contributor was the cost of housing, which was up by 5.7 per cent.

That mostly reflected increased electricity prices and higher costs for material and labour on new builds.

But aren’t house prices tanking?

They are. Yet that has no direct impact on the CPI. The basket of items the ABS measures only includes the costs of new dwellings and rents, not the price of established homes.

So, while the government is copping all the flak for plummeting house prices, it is getting none of the benefit of that through the official measure of inflation.

That’s life in politics.

And after this week’s interest rate rise, it will cop even more flak for average mortgage repayments having risen by $480 a month since the beginning of the year.

The most uncomfortable development for Jim Chalmers was the observation by Reserve Bank Governor Michele Bullock that “inflation is too high and has been driven by domestic capacity pressures”.

Bullock did go on to say that the “inflation impulse” from the Middle East was magnifying those pressures, but the clear message was that the primary cause of inflation was home-grown.

That means the primary solutions must be homegrown, too.

And that means spending cuts.

But where?

Most of the Albanese Government’s biggest spending increases have been in areas that keep faith with its own social contract — aged care, bulk-billing incentives and cheaper medicines, fee-free TAFE, slashing HECS debts and massive increases in support for social and affordable housing.

Economists suggest the government could save billions by peeling back some of the generous incentives on home batteries and EVs and by cracking down further on the intractable blow-outs in defence contracts and the Snowy 2.0 scheme.

It could also put the screws on the burgeoning public service. It has grown by 40,000 people since Labor came to office and will cost taxpayers an additional $20 billion over the next four years.

None of those decisions would be easy. But a growing number of people within Labor are accepting that they must be done, because if the Albanese Government turns another corner on the economy it might be at risk of running itself over.

Mark Riley is the Seven Network’s political editor