As most Australians go backwards, Treasurer Jim Chalmers declares economic victory

With Australian living standards progress lagging most of the developed world, Treasurer Jim Chalmers declared an economic victory for the Labor government: the defeat of inflation without a recession.

The treasurer also warned voters not to expect more big offerings in next week’s budget — a budget the government had not planned to deliver — and said a taxation surge that allowed Labor to promise billions in infrastructure, social welfare and economic subsidies was ending.

“After three difficult years, the Australian economy has turned a corner,” he told the Queensland Media Club in a speech briefly interrupted by climate protesters.

“We said from the outset we would rather a soft landing in our economy than cleaning up after a hard one. And thanks to that strategy, a soft landing is looking more and more likely.”

Stagnant living standards

While the jobless rate remains low and inflation has fallen from 7.8 per cent to 2.4 per cent under the Labor government, living standards have barely budged.

Of 18 Western economies, including the US, Britain, Canada and Japan, Australian living standards improved the least, at just 0.15 per cent a year on average over the past decade, according to the Organisation for Economic Co-operation and Development.

The Labor government has overseen the “steepest decline in living standards on record,” said Liberal shadow treasurer Angus Taylor, a claim based on statistics dating to 1959.

“Instead of responsible financial management, we’ve seen reckless spending, increased taxes, and poor policy decisions that have only made life more expensive for families and businesses,” he said.

Which of the two radically different portrayals of the economy -- success story or disaster -- proves more persuasive will likely determine which party wins the most seats in Parliament.

Polls have narrowed over the past two months from a strong Coalition lead to a closer race as the government offers a series of expensive policies and projects.

The inflation fight

A tax surge that paid for much of the extra spending over the past three years may be ending.

Dr Chalmers said tax revenue forecasts had not changed much since December after $260 billion extra revenue was delivered by three years of lower-than-expected unemployment and high prices for iron ore, coal, gas and wheat.

Inflation also pushed many workers into higher tax brackets, reversing the effect of tax cuts. The second-highest rate kicks in at $135,001.

Some economists have accused Labor of overseeing the fastest and largest increase in the size of the government since Gough Whitlam’s 1970s Labor government. Spending as a share of the economy will rise from 24.4 per cent in 2022 to 27.2 per cent next year, independent economist Chris Richardson has predicted.

“A promise to spend is a promise to tax,” he told The Nightly. “That’s been papered over by the good budgetary luck of recent times.”

Dr Chalmers said on Tuesday the tax-to-GDP ratio would either be stable this year or fall, undercutting one of the primary arguments of his opponents, who argue government spending is out of control.

Mr Richardson was sceptical, given politicians’ natural desire to spend. “You’re listening to someone promising to go an diet while stuffing their face with Doritos,” he said.

Higher for longer

Economists, including Reserve Bank governor Michele Bullock, have said the Government’s extra spending undermined the inflation-busting effect of higher interest rates, which meant rates stayed higher for longer.

The average home mortgage rate is around 6.3 per cent, according to the Reserve Bank. Three years ago it was 2.9 per cent.

Dr Chalmers central claim is that inflation was brought down without driving up unemployment, unlike New Zealand, which endured one of its worst economic performances in 30 years to pull down rising prices.

The election campaign was meant to have begun by now but was disrupted by Cyclone Alfred, forcing the government to deliver a budget on Tuesday.

With many of the new policies that will be paid for from the budget already announced, the government does not have many left. Instead of revealing them on Tuesday, they will be kept for the campaign, Dr Chalmers said.

He said trade tariffs imposed by US President Donald Trump would have a small effect on Australia. By 2030 the reduction to the economy could be 0.1 per cent. Cyclone Alfred will cost the government $1.2 billion, he said.