Dear treasurer, please don’t ‘help’ with the cost of living crisis

Sometimes, one of the hardest things to do, is to do nothing.

You got an itch, you wanna scratch it. You want to lose weight, but you gotta have that snack.

Sometimes, one of the hardest things to do, is to do nothing.Credit:iStock

Sitting still. Waiting. Patience. Forbearance. All these things seem increasingly hard in our 24/7 social media age.

For politicians, the urge to appear to “do something” seems a nearly impossible one to ignore.

And for our new Treasurer, Jim Chalmers, the urge to “do something” appears particularly strong: an economic statement here, a jobs summit there and a mini-budget looming at the end of this month.

Besides getting the election pledges of the new Labor government officially on the books, it’s not clear to me quite why Chalmers needed to break with the usual tradition of holding annual budgets on the second Tuesday of May.

Treasurer Jim Chalmers has a mini-budget at the end of this month.Credit:Alex Ellinghausen

Chalmers was, of course, a staffer to then treasurer Wayne Swan during the global financial crisis when stimulus packages were handed out like candy – and rightly so.

The COVID-19 pandemic also required a rolling, around-the-clock response.

But now is the time to stop. To breathe. To gather strength for the difficult, longer-term economic reforms, like tax reform, fixing energy markets and reducing emissions, which are long overdue.

In its heart of hearts, the new Labor government knows this. And Chalmers has shown promising signs of forbearance in letting the Morrison government’s fuel excise cut expire last Thursday.

But can our new government stand up to the insatiable demand of punters that they “do something” about the cost-of-living crisis?

Chalmers has been delivered a timely and powerful lesson from the example of UK chancellor Kwasi Kwarteng in how financial markets are likely to respond if he errs on the side of loosening the fiscal reins too much.

Hundreds of billions of pounds worth of energy subsidies and tax cuts spooked global capital markets which immediately panicked last week about the UK government’s ability to sell enough bonds to pick up the ballooning tab of government debt. Yields spiralled upwards, forcing the UK central bank to intervene to purchase bonds and calm markets.

Economists also fear this massive boost to consumer demand at a time of supply restrictions will further boost UK inflation – already above 10 per cent – requiring even greater action from the Bank of England to jack up borrowing rates.

British Chancellor Kwasi Kwarteng.Credit:Bloomberg

In a way, it’s Newton’s third law applied to the economic realm; that every action to loosen fiscal policy (by either cutting taxes or boosting spending) requires an equal and opposite reaction from monetary policy (by lifting lending rates).

The rule holds true here, too, and it’s a lesson for Chalmers to note carefully as his own October 25 mini-budget looms.

The Morrison government created a dangerous expectation with its pre-election budget that politicians can and should step in to help ease the rising cost of living with either spending or tax relief.

In truth, the remedy to our immediate inflation woes lies not in Canberra, but in the Reserve Bank’s Sydney headquarters.

From there, on the first Tuesday of every month since May – and again today – the Reserve Bank board has been waging a full-out war on inflation unparalleled in speed and size since the 1990s.

Once it is finished – and most economists expect that will be relatively soon, albeit it may stretch into early next year – the appropriate thing to do will be to sit back and wait to see if it works.

The rates medicine being pumped hot and heavy into the veins of the economy is a radical intervention, indeed. But it will take some time to work its way through the system.

The higher than usual proportion of borrowers currently on fixed interest rate loans – with some sub 2 per cent rate loans still locked in for three or four years – means the pain will be delayed for many.

But when it does arrive, higher borrowing costs will deliver a king-hit to household budgets.

We are in for a painful period of adjustment as highly indebted households cut back on spending. But that is, after all, the whole point. To soften the blow would be simply to soften the potency of the medicine.

Indeed, every dollar Canberra may be tempted to pump into the system now to “help” would simply be a dollar the Reserve Bank will need to pluck out from hip-pockets again via higher interest rates.

The bottom line is Australians can’t afford another “cost of living” budget like the last one in March, full of tax cuts and giveaways to help us pay our bills.

The only option for households is to simply dig in against rising prices (including the cost of borrowing), cutting back where we can and hoping the harsh rates medicine works quickly enough to take the heat out of price pressures.

Slowing the economy enough so that inflation is tamed back into the 2 to 3 per cent target band of the Reserve Bank will help us all to manage our household budgets in the future and help avoid the harmful erosion of the real value of our incomes and savings.

So while the political lure to “do something” to ease the cost of living squeeze in this budget may be strong, fiscal forbearance must be order of the day.

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