Federal Treasurer, The Hon Jim Chalmers MP speech 28 July 2022
Australians are overwhelmingly optimistic and confident people.
Our optimism, and that confidence, is well‑founded – because it rests on our ability to navigate difficult times together, and emerge stronger.
Australians know their government changed hands at a time of instability, uncertainty and volatility – around the world and at home.
Today, through this Parliament, I want to explain to Australians what this means for you – for your living standards, for the economy you work in, and for the Budget that funds the services you rely on.
I will explain some of the international factors we are buffeted by.
Detail the domestic economic and budget pressures we are dealing with.
Provide some revised Treasury forecasts that try to reflect the circumstances we have inherited – in advance of a full update in the October Budget.
And outline our plan to deal with these conditions.
This is about giving you the best sense we can of what is really going on.
Because there is no use tiptoeing around the pressure that people are under.
You know what we are up against. You see it every day. At the supermarket. In your pay packet. When the electricity bill arrives.
And you did not send us to this place to bury the bad news, gloss over the glaring issues, or wish away the warning signs –
Or to pretend that our problems will solve themselves with more waiting, and more wasting time.
That approach has already given our country a wasted decade of missed opportunities and messed up priorities.
You are already paying too much for that in the form of:
- High and rising inflation;
- Falling real wages; and
- A trillion dollars of debt that will take generations to pay off – without a generational dividend to accompany it.
Nine years of mess can’t be cleaned up in nine weeks – it will take time. Australians know this too.
And they know that progress begins by us facing up to these hard realities, these hard truths.
Because only by facing up to these challenges can we transform them into opportunities.
And this time of great challenge for our country is also a time of great opportunity.
The opportunity to build a stronger and more resilient economy – that converts the potential of our people into prosperity for our nation.
An economy powered by cleaner, cheaper, more reliable energy.
Where more people have the right skills, in secure jobs, with decent wages growing strongly and sustainably.
And a better future, built with more opportunities for more Australians in more parts of our country.
The Australian economy is growing – but so are the challenges.
Some are home‑grown, others come from around the world.
As Governor Lowe and I were reminded at the G20 meeting a fortnight ago –
The global picture is complex, and the outlook is confronting.
The world economy is treading a precarious and perilous path.
Higher global inflation. Slower global growth. Ongoing conflict. The impacts of COVID. Clogged supply chains.
All of this affects us, in some form.
At the G20 meeting, the IMF flagged they would again be revising down their global growth forecasts.
And this week, they have – significantly downgrading the outlook for global growth in both 2022 and 2023.
These downgrades are broadly in line with Treasury’s updated outlook for the global economy.
The Treasury is forecasting global growth of 3¼ per cent in each of the next three years, which is half a percentage point weaker in 2022 and 2023 than expected in the Pre‑election Economic and Fiscal Outlook.
The IMF is expecting global inflation to reach 8.3 per cent by the end of this year – driven by higher food and energy prices, and strained supply chains.
In the United States overnight, the Federal Reserve has again raised interest rates by 75 basis points in response to the highest inflation figure recorded in more than 40 years.
And tonight, the preliminary US GDP result for the second quarter is again expected to be weak – after falling by 0.4 per cent last quarter.
China is our biggest trading partner by a long way – what happens with China’s domestic economy has a direct link to our national activity, income, and prosperity.
China’s strict COVID containment measures have had a substantial impact on their output and have made existing supply chain disruptions more severe.
As has Russia’s unilateral, immoral and illegal invasion of Ukraine –
Which undermines energy and food security – dramatically pushing up global prices.
And all of this puts pressure on our economy and our Budget.
Once again, Australia is outperforming much of the world, but that doesn’t make it easier to pay the bills at home.
More Australians are in jobs than ever before – and that’s a very welcome outcome – but fewer Australians are feeling confident about the choppy waters our economy is in.
Because they see the impact that high inflation is having on their living standards – in an environment where workers aren’t getting wage rises sufficient to match price rises.
Our high inflation is primarily but not exclusively global.
It will subside but not overnight.
It’s been turbocharged by a decade of domestic failures on skills, on energy and on supply chains which just aren’t resilient enough.
Left untreated, inflation which is too high for too long undermines living standards and jobs, and wrecks economies.
But the medicine is also very tough to take – and millions of Australians with a mortgage are feeling that pain right now.
Rate rises began before the election, they rose by a full per cent across June and July, and the independent Reserve Bank has told us to expect more to come.
There’s no point pretending these rate rises don’t hurt – they do and they will.
Every extra dollar Australians have to find to service the mortgage is a dollar that can’t help meet the high costs of other essentials.
Governments shouldn’t make it harder for the RBA on the demand side but, more than that, we should be working to address problems on the supply side.
Some of the conditions determining this inflation problem are outside of Australia’s control and largely unavoidable.
As much as we can provide support, we can’t control the war in Ukraine, or China’s COVID policies.
Floods and new COVID variants bring the supply chain disruptions and worker absences we are experiencing.
But there are things we can control.
And some of these conditions have been building for a long time and were avoidable:
- A decade of energy policy paralysis – with not enough investment in cleaner, cheaper more reliable energy, and not enough certainty for investors – that’s pushed up power bills.
- A lack of the right investment in skills and local manufacturing capability – that’s seen our productivity flatline and supply chains break.
- And an objective to keep wages low as a deliberate design feature of the economy – that’s contributed to a decade of stagnant pay.
And let’s be really clear about something.
Inflation is high and in the near term will get higher – but the primary cause of this is not higher wages – nowhere near it.
We don’t have an inflation problem because workers are earning too much or because we are in some kind of a wage‑price spiral.
Real wages growth over the past decade has averaged just 0.1 per cent a year.
In the year to March, real wages fell 2.7 per cent – the worst result in more than two decades.
And once wages growth data for the June quarter is released in a few weeks, it’s likely this fall will have accelerated, given yesterday’s inflation outcome.
The wages of Australian workers are not causing this inflation.
The fault lies with a decade of wasted opportunities, wrong priorities and wilful neglect – that Australians are all now paying for.
New economic forecasts
This is the context for the updated Treasury forecasts for our economy that I release today.
Forecasts are never perfect, but these better reflect the economic circumstances our new government is now dealing with – compared with what was set out before the election.
In the pre‑election forecasts – released a little more than three months ago – inflation was expected to peak at 4¼ per cent.
It’s already 6.1 per cent through the year to June, and now forecast to peak at 7¾ per cent in the December quarter this year.
The current expectation is that it will get worse this year, moderate next year, and normalise the year after.
We haven’t reached the peak yet – but we can see it from here.
Treasury expects headline inflation at 5½ per cent by the middle of next year, 3½ per cent by the end of 2023, and 2¾ per cent by the middle of 2024 – back inside the RBA’s target range.
Inflation will unwind again, but not in an instant.
Just as the domestic forces contributing to some of the supply side pressures have been building for the best part of a decade, it will take some time for them to dissipate – but they will.
In the meantime, higher interest rates, combined with the global slowdown I’ve described, will impact on Australia’s economic growth.
The National Accounts in the March quarter showed that the economy had not been performing as strongly as had been predicted pre-election – we saw 0.8 per cent growth instead of 1.8 per cent growth.
And the headwinds our economy is facing – higher inflation at the top of that list, along with slowing global growth – are now reflected in the revised economic outcomes and forecasts.
This has cut half a percentage point from growth for the last financial year, for this financial year, and for next financial year.
It’s expected that real GDP grew by 3¾ per cent in 2021‑22, instead of 4¼ per cent as was estimated pre‑election.
The pre‑election forecast for GDP growth in 2022‑23 was 3½ per cent. This has now been revised down to 3 per cent growth.
And growth is expected to slow further in 2023‑24, at 2 per cent – down from the 2½ per cent previously predicted.
A key part of this weaker growth outlook is due to weaker consumption, reflecting higher inflation and higher interest rates.
While some households have built up savings buffers, others are under much more pressure.
Net exports will also be a bigger‑than‑expected drag on growth in the near term – as flooding hits commodity exports, and as imports increase with businesses restocking.
Weaker dwelling investment is also part of the story – because of higher interest rates, but also the capacity constraints in construction.
That’s what I mean by a growing economy, but with growing challenges as well.
Jobs and wages
This complex picture is reflected in the updated outlook for unemployment and wages.
The unemployment rate is expected to remain low through the latter half of this year before returning to 3¾ per cent by June 2023 and 4 per cent by June 2024.
At the same time, the forecast for nominal wages growth is being upgraded – from 3¼ per cent to 3¾ per cent – both for this financial year and next financial year.
If this eventuates – and I’m careful, cautious and conscious of the history here – it would be the fastest pace of nominal wages growth in about a decade.
The harsh truth is – households won’t feel the benefits of higher wages while inflation eats up wage increases, and then some.
Real wages growth relies on moderating inflation and getting wages moving again.
Based on current forecasts, real wages are expected to start growing again in 2023‑24.
And there is a key difference now.
Australian workers now have a government with an economic plan to boost wages, not deliberately undermine them.
Our new Government has begun its work in this time of serious uncertainty and substantial challenges as I’ve described them.
With a trillion‑dollar handicap in our saddlebags.
The Budget we inherited is bursting with waste and rorts, booby‑trapped by expiring measures, and burdened by long‑term demographic challenges that come with critical and necessary spending.
While the final Budget outcome for 2021‑22 – published soon – is likely to show a dramatically better than expected outcome –
Temporary factors like supply chain disruptions, capacity constraints and extreme weather have delayed some spending – and low unemployment and volatile commodity prices boosted revenue.
These are factors that will not last forever – or for long.
The short-, medium- and longer‑term pressures on the budget are more pronounced.
The temporary improvement in tax receipts may not persist over time, the impact on payments will persist, and the cost of interest on debt will grow as more debt is refinanced at higher yields.
A full set of fiscal forecasts will be ready for the October Budget.
But we already know that additional COVID‑related expenditure so far costs the Budget an extra $1.6 billion this year.
We expect that government payments will be around $30 billion higher over the forward estimates than was forecast pre‑election, because of inflation and wage expectations and how they flow through.
And we know that vital government programs, which are already growing faster than the economy, have upside risks on spending growth.
This includes health spending, the National Disability Insurance Scheme, providing decent aged care after years of neglect, and fairer pay for aged care workers – which the Fair Work Commission is currently considering.
Then there are the hidden cost blowouts we are beginning to discover – like the Modernising Business Registers project, which was not properly resourced, and could be $1 billion over budget.
Finally, we know that the debt burden left to us – the highest level as a share of the economy since the aftermath of the Second World War, with deficits stretching beyond the decade – is growing heavier because of the impact of higher interest rates on repayments.
This is not just COVID debt we are repaying – our predecessors had more than doubled gross debt before the pandemic hit.
And we know that the interest payments on government debt will be the fastest growing area of government spending – faster than the NDIS, aged care and hospital funding.
For these reasons, our Government must make the hard decisions necessary for responsible budget repair.
So that in the future, when there is another pandemic, or another price surge, or more global pressures, future governments are not left in this situation.
With so many problems to solve, but so few resources to solve them with.
Building our resilience against future shocks means starting to deal with the low‑quality spending embedded by the previous Government.
That starts with the Audit of Rorts and Waste that the Minister for Finance and I, and our departments, have begun.
Going through the Budget line‑by‑line and making sure that spending is about building value, not buying votes.
Because right now, every household has to make tough decisions about what they can and cannot afford – and it shouldn’t be any different for their government.
And because the Budget should be about high quality investments in the right priorities.
The Australian people endorsed our priorities in May and they’ll see them budgeted for in October.
When the defining challenges in our economy are high and rising inflation, falling real wages, and choked supply chains –
And when our choices are constrained by the fiscal situation –
Our economic plan will do three things to lift the speed limit on the economy.
First, help Australians with the costs of living – by cutting child care costs for approximately 1.26 million families, and reducing barriers for parents – overwhelmingly women – to work additional hours; and by cutting the cost of medicines on the PBS by up to $12.50 a script.
Second, grow wages over time – by successfully arguing for a decent pay rise for the lowest paid; by supporting decent wages in the care economy; by training people for higher‑wage opportunities; by investing in industries which will deliver more secure, well‑paid jobs.
Third, unclog and untangle our supply chains and deal with the supply side of the inflation challenge – by investing in cleaner, cheaper more reliable energy; by addressing skills and labour shortages; and with a National Reconstruction Fund to make us more self‑reliant.
The growing pressures on the economy and the country don’t make our election commitments less important – they make them far more crucial.
Because our economic plan is a deliberate and direct response to the challenges and opportunities of this age:
- Responsible cost of living relief with an economic dividend – in a time of higher inflation.
- Investing in the potential of our people – in a time of flatlining productivity, skill shortages and falling real wages.
- Action on climate change – before we run out of time.
- And focusing on budget repair and quality spending – in a time of substantial fiscal pressures.
Mr Speaker –
Australians are paying a hefty price for a wasted decade.
They know their new government didn’t make this mess, but we take responsibility for cleaning it up.
In our first few months in government –
The scope and scale of the challenges left for us to tackle – some parts known, other parts hidden – have been made clear.
These challenges are confronting for all Australians, but we are not daunted.
Because in these first few months, we have also been comforted, encouraged and energised by the sense of cooperation and common purpose Australians share.
People know not every good idea can be funded, not every support program can continue indefinitely.
But there is a genuine appetite to address these challenges, a broad acceptance of the hard things we have to do now, to pay off in the future.
Australians know we’ll only rise to this occasion if we work together.
That’s what the Jobs and Skills Summit in September will be all about.
It’s what the Albanese Labor Government will be all about.
Yes, we are in a challenging and changing world.
The economic picture I have set out today represents a convergence of challenges, the kind of which comes around once in a generation.
But this once‑in‑a‑generation challenge also represents a once‑in‑a‑generation opportunity for our country.
The opportunity to build a better future.
That’s why our agenda is a multi‑year effort for a multi‑generation benefit.
For a future that restores a link between hard work and decent wages.
A future that recognises uniquely Australian potential and rewards it with uniquely Australian prosperity.
A future that revives our ambition on climate change and repairs our diminished standing in the world.
A future where we make more things for ourselves. Create more wealth for ourselves. And control our own destiny.
We have it within us to stare down these threats, steer our way through this difficult period, and seize the opportunities of this new age.
With an economy and a budget as resilient as the Australian people themselves.
And with optimism and confidence that our best days lie beyond.
I thank the House.