The new treasurer, Jim Chalmers, is betting on increased capital spending to boost the productivity of the economy and alleviate a “cost of living crisis”.
After Australia’s energy regulator on Thursday raised standard electricity prices by up to 20% for some customers, Chalmers said the increase revealed “a very serious situation” and was just one of the many challenges left by the Morrison government.
“Electricity prices are the apex of the cost of living crisis,” Chalmers said, adding the increase would intensify “extreme pricing pressures” in the economy, including significantly higher costs. for construction and other sectors.
The Treasurer expanded on comments he made on Wednesday, when he described Albania’s Labor government as inheriting “catastrophic” budgetary conditions.
“Fiscal vandalism,” including deeply rooted bad policies, would take time to mend, Chalmers said.
But he had seen enough to rule out the possibility of extending either the six-month reduction in excise duty on fuel – which cost $3 billion – or the tax offset for low and middle incomes.
“We are not considering changes of this nature,” he said.
Economic data from the Australian Bureau of Statistics (ABS) on Thursday added to evidence that price pressures were building but the economy remains on strong growth.
ABS phone surveys from May 11-18 found that 38% of businesses planned to raise prices over the next three months, with almost all citing rising costs of goods and services , and just over 75% reporting rising energy costs.
Of those not raising prices, around 50% said they wanted to retain customers while 46% said they were on fixed costs that protected them.
KPMG chief economist Brendan Rynne said inflationary concerns were becoming more pervasive across businesses, with rising wages also beginning to erode profit margins.
“This is further compounded by the fact that most companies in 2022 achieved lower revenues than the levels they expected to receive, suggesting that corporate profitability for this year is tighter than last year and what was planned,” Rynne said.
More positive news for the government was the indication that private investment in new plant and equipment (Capex) for 2022-23 increased by 12% from an initial estimate to around $130.5 billion, according to ABS.
However, Covid and flooding disruption reduced real private business spending by 0.3% in the March quarter, compared to the previous three months. Spending on buildings and structures decreased by 1.7%, while spending on machinery increased by 1.2%.
The headline result was below the 1.5% expected by economists and is expected to lower the March quarter GDP growth figures when released next Wednesday.
The higher estimate of expected Capex should improve the efficiency of the economy, helping Chalmers’ efforts to support growth while mitigating inflationary forces.
“The outlook for business investment remains strong, but headwinds from capacity constraints and rising costs will hurt, but may also lengthen the investment cycle,” the ABC said.
Such spending “will increase the productive capacity of the economy and put downward pressure on inflation over time,” the bank said.
“In the short term, however, more business investment may add to the inflationary push and there is evidence of rising engineering and construction costs in the system.”
Chalmers said the government would build on a $20 billion investment in its Powering Australia program to strengthen the grid, enable faster uptake of renewables and drive down electricity prices.
He said he would rely on a “talented” economics team which included Finance Minister Katy Gallagher, as well as Andrew Leigh and Matt Thistlethwaite. Chalmers also intends to consult his close friend and former Rudd government adviser, Andrew Charlton, who he said was a “first-rate thinker”.
Chalmers, who earned a doctorate with his dissertation on ‘brawling statesman’ Paul Keating, said he spoke with the former Labor treasurer and prime minister a few times a week. “My friendship with Paul Keating means a lot to me,” he said.
When asked how he plans to deal with potentially steady rate hikes by the Reserve Bank of Australia in the coming months, Chalmers said he intends to be ‘a chief explainer’ , much like Keating, and trying to highlight “where people fit into the story”.
Saul Eslake, an independent economist, said that very good treasurers made good decisions, were able to persuade the public that it was a good decision and were “willing and able from time to time to annoy his prime minister by advocating things that are ‘good for the economy’ but could cost votes.
“Keating was good on all three,” Eslake said, adding that treasurers since had been widely mixed on the first or second of those measures, but failed or didn’t try on the third – except of Liberal Joe Hockey.
Chalmers said he is making progress by talking to several heads of agencies — from the Reserve Bank to the Foreign Investment Review Board — and business groups such as the Council of Small Business Organization. By Thursday morning he had also spoken to all state and territory treasurers except Cameron Dick from Queensland and Matt Kean from NSW.
Asked if he planned to revoke the political appointments of the Morrison government from senior positions, Chalmers said: “If they do a good job, they will probably stay.”