analysis: With Australia’s economy in turmoil, Labor is under pressure to deliver on election promises. But there’s a show stopper coming

Today marks two months since the election. It’s been a busy period. Four prime ministerial trips abroad, efforts to repair diplomatic rifts, an energy crisis, a worsening inflation problem, and a new wave of COVID.

Some election promises have already been implemented. Others are subject to reviews, consultations and cross-bench negotiations.

The Opposition has grumbled about the “very leisurely” approach to reconvening parliament, but new ministers have hardly been twiddling their thumbs for two months. The government can point to plenty of activity.

Still, when the new parliament sits next week, Labor will be under pressure to explain what progress is being made on one of its most important promises — delivering real wage growth.

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Treasurer Jim Chalmers warns of “confronting” economic update

On Tuesday the ceremonial opening of the new parliament will take centre stage. A new speaker will be elected (Labor MP Milton Dick), the enlarged crossbench will find its place and there will be plenty of interest in the approach Opposition Leader Peter Dutton takes in Question Time and how the Prime Minister responds.

The parliamentary week will also see the government’s bill introduced to legislate a 43 per cent by 2030 climate target and on Thursday, Treasurer Jim Chalmers will deliver a highly anticipated ministerial statement on the economic and budget outlook. He’s already warning it will be “confronting”.

But perhaps the biggest showstopper of the week will come not from the parliament but the Bureau of Statistics. On Wednesday, the June quarter inflation figures will tell us just how hot prices are running.

Inflation will be another performance metric for the RBA

The March quarter inflation figure of 5.2 per cent, shifted the course of the election campaign. It was much higher than expected and, coupled with low wage growth, was weaponised by Anthony Albanese as “evidence” of the Morrison government “failing working families”. The Coalition never recovered.

In the weeks after the election, Reserve Bank Governor Philip Lowe warned inflation would get worse, hitting 7 per cent by the end of the year. On Wednesday we’ll find out if it already hit that mark during the June quarter, whether the Reserve Bank has underestimated inflation again, and whether interest rates will therefore rise faster and higher as a result.

Reserve Bank governor Philip Lowe after a press conference at the RBA head office in Sydney.
If Philip Lowe thought the last two years of the pandemic were a challenge, the next 12 months will be critical.(ABC News: John Gunn)

The June quarter inflation number will become another measure of the RBA’s performance, which has come under intense scrutiny and criticism.

Yesterday, the Treasurer announced the first wide-ranging review of the Reserve Bank in 30 years. 

He was careful to deny this was about taking “pot shots” at the bank or adding to the general pile-on about how slow it was to cut interest rates before the pandemic and the error it then made in suggesting they would remain at record lows until 2024. Chalmers says he wants to “build confidence” in the central bank.

There are, however, notable points of difference between the Treasurer and the Reserve Bank. Or at least, different points of emphasis.

The first is over the impact of interest rate hikes. The Reserve Bank’s Deputy Governor Michele Bullock says, on balance, “households are in a fairly good position” to manage interest rate rises. The Treasurer, by contrast, points out “not everybody has a buffer, particularly in the teeth of this cost-of-living crisis”.

Second is what’s driving the problem. The RBA Governor says rate rises are needed because the “current growth in aggregate demand is putting pressure on the capacity of the economy”.

The Treasurer accepts demand is “playing a part” but prefers to blame “choked-off supply chains” for driving up inflation. By this, he means the global energy crunch, food shortages and the lack of skilled workers.

Then there’s the issue of wage growth

Third, there’s the question of how hard the RBA should go in raising rates to tackle inflation. On this, the government is clearly alive to the anxiety of mortgage holders. “The Reserve Bank will make its decisions based upon their assessment of where the economy is at,” the Prime Minister told 3AW yesterday, “but they need to be careful that they don’t overreach as well.” 

Tread carefully, in other words.

Both the government and the Reserve Bank want to bring inflation down while inflicting the least amount of pain on the economy.

How quickly that can happen and how long workers therefore must wait for a better standard of living, no one really knows. Much depends on global forces. The Treasurer says the timing of any real wage growth “remains to be seen”, but he does expect the “situation to be better next year than this year”.

The government argues it’s done all it can in the short time it’s been in office. It encouraged the Fair Work Commission to lift the minimum wage by 5.1 per cent and is promising wage stagnation will be discussed at its Jobs and Skills Summit in September. But Labor knows it needs to deliver some real wage growth before the next election.

The review ordered by Chalmers comes at a sensitive time for the RBA. It will consider whether the bank’s long-standing inflation target of 2-3 per cent is still appropriate. It will look at the its accountability and culture. And it will look at the structure of the board.

The Treasurer has opted for a relatively speedy review. He wants the recommendations in his hands before two board vacancies come up next year. And before he makes the big call on whether to extend or replace Philip Lowe, whose current term as governor is up in September.

If Lowe thought the last two years of the pandemic were a challenge, the next 12 months will be critical.

David Speers is the host of Insiders, which airs on ABC TV at 9am on Sunday or on iview, and a co-presenter of Q+A on Thursday at 8.30pm.