The absolute front line in battling inflation in Australia is – as new treasurer Jim Chalmers knows only too desperately well – keeping a lid on wage increases.
That’s, across the public sector, both federal and even more the much bigger state bureaucracies; across the – now quite small – unionised private sector; and all the rest of those private sector jobs in big and mostly small and medium sized businesses.
I cannot think of a more “confronting”, absolutely central, challenge for an incoming Labor treasurer.
To say: Yes, inflation is 6 per cent and heading higher – to probably close to 8 per cent in this current September quarter; but 14 million or so Aussie workers have to be satisfied with a wage rise of less than half that – 3.5 per cent – or indeed even less than 3 per cent!
So when he warns somberly of Thursday’s Economic Statement being “confronting”; he is really saying he is going to have to lay out those sort of numbers as ‘forecasts’ for the year ahead, while they really are more of a ‘wish list’ and a rather desperate one at that.
All incoming Labor governments – well, the three of the four we’ve had since 1945 – have been absolutely terrified of repeating the chaos of the ‘first one’, Whitlam, and the eight years of opposition wilderness that followed.
Incoming PM Bob Hawke built his ‘not-Whitlam’ policy structure around the Prices and Incomes Accord – and Bill Kelty, with a little bit of help from a certain Paul Keating.
Hawke was able to get his wage restraint, not from ‘wishing it’, Chalmers-style, but by trading off increases in the so-called ‘social wage’ – including tax cuts and especially compulsory super.
So what has Chalmers got to offer?
But in any event, outside the public services there really is no ‘big union’s and ‘big business’ and certainly no Bill Kelty to do a deal?
The other critically important point that has not been even recognised far less understood: the RBA has never had this challenge before.
This is the first time the ‘modern RBA’, the one that since 1996 has had the formal 2-3 per cent inflation target, has had to try to fight inflation this high, mostly imported – it hasn’t followed a classic wage surge – and comes from a series of, frankly, weird causes.
They are Russia’s war on Ukraine; China slowing under its zero-Covid policy; the ongoing impact of Covid right across the economy, both global and local; and two years, and counting of zero immigration.
To fight this inflation, it’s all down to the RBA and it has only one weapon: raising interest rates.
It’s not a coincidence that commentators keep dubbing these – rising – inflation numbers as the “biggest in, say, 30 years”, excluding the short-lived one-off surge from the GST in 2000.
That’s because we haven’t seen inflation this high pretty much since the 1980s.
For 25 years the ‘modern RBA’ has been able to tinker with its official rate, albeit ‘tinkering it’ all the way up to 7.25 per cent in 2008 – note, it’s going to 1.85 per cent on Tuesday – and ‘keep’ inflation under control.
That’s the other challenging point.
This is also the first time the RBA has started an inflation fight, starting from a zero official rate.
With every other central bank in exactly the same position.
So Chalmers sets out the “confronting” news/forecasts Thursday afternoon.
That comes between the Fed in Washington announcing its official rate rise – almost certainly 0.75 per cent – and then just before midnight, the US growth figure for the June quarter.
With the bulk of US economists saying the Fed is hiking its rate into recession.
If so, the two biggest economies in the world will be in recession.