Jim Chalmers says inflation is “the dragon we need to slay”. But anyone who’s watched the TV show Game of Thrones knows that if you’re going into battle, it’s always better to have the dragon on your side.
As things stand, the dragon is on Peter Dutton’s team. Like the fearsome beasts that serve the dauntless heroine Daenerys Targaryen, the opposition leader expects that inflation will flame and incinerate the foe. Strikingly, Dutton’s budget reply this week offered not a single new policy. This was a notable missed opportunity to get some attention with a fresh initiative; opposition leaders don’t get many such chances. So he must be feeling confident that inflation will do all the work.
IllustrationCredit: John Shakespeare
And maybe it will. Dutton is very unlikely to win the next election in his own right, but Anthony Albanese could certainly lose it. A big price shock could be that serious.
When Labor was in opposition, one of its favoured lines of attack on the Morrison government was to say “everything is going up, except your wages”. The most powerful moment in Dutton’s budget reply speech was when he took the same line and turned it against Labor: “On Tuesday, the treasurer failed to mention in his speech what Labor’s budget papers revealed: ‘Everything is going up, except your wages.’”
And while the inflation dragon was stirring when the Coalition was still in office, now it’s raging. Not Labor’s fault, of course, but now Labor’s responsibility.
“Cost of living, power prices, taxes, interest rates, unemployment, and the deficit are going up, or will be going up under the government’s predictions,” said Dutton. “The same budget papers confirmed that real wages are forecast to go down.” Quite so.
Comically, Dutton’s deputy, Sussan Ley, on Friday said she thought Dutton was “impressive”, but she said it because she was told to say it. It was in her talking points.
Under the heading “Peter Dutton’s Budget in Reply”, Ley’s printed talking points for her doorstop with the Canberra press gallery read: “I thought Peter Dutton was really impressive last night and I know others thought that too.” There’s nothing like sincerity in politics. Gratefully, she only delivered the first part of the sentence.
The Coalition knows it’s on a likely winner here. Its polling firm of choice, Crosby Textor, would be telling the Liberals the same thing it told its corporate clients this week. In summarising the hopes and fears of two Western Sydney focus groups that it convened on budget night, Crosby Textor reported to clients: “There remains significant goodwill towards the Albanese government and a sense that it is still too early to judge their economic performance.
“We expect that goodwill to remain largely intact after the budget as the fiscal repair measures are unlikely to be keenly felt by the community yet. But as interest rates continue to climb, electricity bills keep rising, infrastructure lags, and fiscal repair rhetoric meets reality – that goodwill cannot last forever.”
The Coalition claims that a typical family will face about $2000 in extra costs by Christmas. We’ll see, but it’s certainly possible. Already, the monthly cost of repaying a $750,000 mortgage has risen by $1250 since May, according to RateCity. The next official rate rise is expected on Tuesday, on Melbourne Cup day.
So can Labor slay so fearsome a prospect? The principal dragon-slayer is not the government, of course, but the Reserve Bank. It’s the lead knight, official interest rates its sword. But the government is an enormous economic force and can either help or hinder. If a government is reckless and irresponsible, it will boost spending, feeding the dragon and forcing the Reserve Bank to swing its sword harder. If a government wants to help slay the dragon, it will contain spending, a good squire to a knight in combat.
To the government’s credit, this week’s budget does exactly that. It expects to increase spending by a minuscule 0.3 per cent per annum over the four years of the forward estimates. So, no harm done. The Reserve bank is allowed to do its job unhindered.
But there’s another task for the Albanese government in managing inflation, and it’s a big one – containing the surging price of electricity and gas.
The biggest news surprise from the budget was the Treasury’s forecast that retail electricity prices will rise by “20 per cent nationally in late 2022” and “by a further 30 per cent in 2023-24″. It also forecasts a 20 per cent rise in retail gas prices this year and another 20 per cent next. This would be crippling for many households and ruinous for many businesses.
To Chalmers’ credit, he authorised Treasury to publish those specific forecasts where he need not have; he could have told them to fudge it. So he has sounded the alarm quite knowingly. But having sounded the alarm, he hasn’t proposed a solution. Except to say that the government will consider market interventions to try to dampen these surges.
What could it do? “The near-term shock is huge,” observes the former Treasury secretary and policy guru Ken Henry. “But it’s got nothing to do with Australia,” a direct result of the global shock created by Russia’s invasion of Ukraine. How to explain the problem and solution to Australians? “It’s our gas – Putin doesn’t have his arms around our gas,” Henry tells me. Therefore, it’s Australia’s to control.
Henry has some options for Albanese to consider, starting with the gas price. Four options, in fact. The government could choose to use any one of them, or more, and possibly all four in combination. “And in normal times probably none of them would be regarded as reasonable,” he adds.
First is a simple price cap. Setting a maximum retail price for gas companies to charge.
Second is a domestic gas reservation. That is, to require the gas companies to reserve a fixed quantity of their gas output – or a percentage, as Western Australia has done successfully for years – for the local market before exporting. The Albanese government already has done something akin to this by demanding that the three biggest gas companies promise to keep enough gas to meet the local market needs for the year ahead. Yet the prices are surging regardless. So this alone will not suffice.
Third is to put an extraordinary tax on gas exports, perhaps a “super profits” tax. “Just choose your tax rate and you can determine by how much the domestic price will be below the export price,” says Henry. “Tax on exports generates revenue, mainly from foreign shareholders in foreign companies.
“I think that’s a saleable option politically – you are saying to Australian consumers, ‘This is your gas, and you consumers are getting it in the neck because of absurdly high prices. We will take action to force the price down below the world price and, by the way, it has the extra benefit of bringing some revenue to the budget.’ ” As Norway has long done.
“The argument doesn’t seem to be too difficult, but as Wayne Swan and Kevin Rudd showed [with their proposed super profits tax], it’s hard to have a rational debate in Australia.”
Attractive though the idea may be, the Albanese government would be very wary of an export tax on gas because it has promised Japan and South Korea reliable and steady supply and wants to keep happy these two biggest buyers and close diplomatic friends.
Finally, Henry says the government could use the threat of price caps to force the gas companies to impose limits, but would need to be prepared to follow through.
Henry also has a tip for the government when it encounters the inevitable screams of protest from the gas producers about “sovereign risk”.
“What is the precise sovereign risk that investors worry about? That whenever Russia invades Ukraine, prices go through the roof? They’re trying to beat an egg white into a blood souffle.”
If the Albanese government, working with the Reserve Bank, can tamp down the inflation surge and manage to contain energy prices, perhaps it can slay the dragon after all. Or, at least, achieve the Hollywood alternative to Game of Thrones dragons. How to Train Your Dragon was a very cute animation. And highly successful at the box office.
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