Economic Report Card | Insiders On Background

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Parliament has wrapped up for the year and Labor is feeling pretty good about life heading into the summer.

A big election win, an opposition in disarray, major reform of environment law was passed through Parliament on the final sitting day. Labor has good reason to celebrate.

But not everything is going swimmingly. Inflation edged higher during the week, and some economists are even warning the next move in interest rates will be up.

It's not where the Treasurer wants inflation to be. We do acknowledge that the through-the-year number was higher than we'd like it to be.

With just 29 days until Christmas, this is the worst possible news for struggling mortgage holders who can now kiss goodbye to any rate cut, any rate cut at all.

The budget, meanwhile, remains mired in structural deficits.

The government, which railed against Peter Dutton's plans to slash the public service at the election, is now asking departments to identify savings of up to 5%.

Fixing the budget, bringing down inflation and making the economy more productive all remain unfinished business.

So I'm keen to talk to our two budget night regulars for their thoughts on the challenges right now and the challenges heading into next year.

Chris Richardson is an independent economist with rich insight and a renowned budget watcher.

Aruna Sathmapalli is the CEO of the Grattan Institute and I'm David Spears on Ngunnawal Country at Parliament House in Canberra. Welcome to Insiders on Background.

Aruna and Chris, welcome to you both. Thanks so much for joining us.
Always a pleasure.

So here we are. Look, we're a few weeks out from the mid-year budget update.

I'll get to that in a minute, but I just want to get your thoughts quickly on the inflation number that we saw during the week.

It was up, inflation both headline and underlying up, higher than expected above the reserve bank's target zone once again well above the government's comfort zone clearly we were told inflation had turned the corner chris is it clear why it's rising again

uh it's rising again um for good reasons but it's generating some bad implications the the economy has picked up it started um accelerating from the middle of uh 2024 with a tax cut we've now had a few uh interest rate cuts cuts.

And the AI boom is helping the world economy and the Australian economy. People are building stuff off the back of that.

That's all the good news, right? The economy has picked up, but it hasn't picked up that much. And that pickup seems to have been enough to start to drive inflation back up again.

Or, in other words, the engine of the Australian economy is pretty clapped out. Our productivity is so poor, you don't need much pickup in speed before we begin to blow smoke.

and that smoke is a lift in inflation. Small, but worrying.
Yeah, worrying particularly for mortgage holders, nervous about rates not coming down to going up again.

Aruna, we know for the last term of parliament, the government spent much of its time and certainly every budget grappling with how to help households with inflation, with cost of living, without making the problem worse by spending too much money, putting too much in their pockets.

It did a whole bunch of things, but one of them that remains is this household energy rebate, you know, a bit of money to help you with your energy bills.

It's due to expire at the end of the year, in about a month's time.

What should it do? Should it turn the tap off or keep this going?

Yeah, look, I mean, I think my answer has been every time they've done it that it isn't the best policy, and I wish we didn't do these sorts of things.

That said, I mean, the politics are pretty diabolical.

And one of the difficulties with this sort of policy is precisely this. It is very hard to withdraw.

So at whatever time it looks like you need to pull it back, it's always been temporary.

There's this risk that you come under pressure to extend it because,

you know, there's always going to be a justification for a form of cost of living relief to households. I just can't imagine a universe where that's not going to be welcomed.

So it's a tough thing to pull it back.

And part of what we're seeing with the inflation forecasts is an anticipation that that bill relief will be removed, and then an expectation that headline inflation will go up.

So, that's always just part of the run of how this measure was going to work.

But I expect there'll be strong pressure to extend it. I mean, actually, people would save a lot more by switching to cheaper and better plans.

So, if we want a reform that actually will help people save on electricity,

really pushing retailers to move their customers onto better plans is a more durable solution to energy bills. Look, it's a good reminder, shop around for a better deal.
You'll probably find one.

Chris, these things, and even I suppose in years gone by, halving the fuel

excise, they're temporary measures, they help, but ultimately, you know, you've got to bring these things to an end because they just cost too much.

What are your thoughts on whether the government should turn the tap off on this energy rebate?

If you're looking at what good policy would do,

you would get rid of that rebate. The problem is, if you're looking at what good politics would do, you're probably going to hang on to it.
So, why is it bad policy? Well, Aruna's exactly right.

Getting to the things she was just mentioning, this is not a policy that encourages people to do sensible things.

It isn't targeted at those who are worst off. So, it's not actually cost of living.
It goes to 11 million families. No, no, everybody.

It's not something that encourages consumers to use less power or use less power at the time of the day when it's costly to produce.

It's not something that convinces businesses to invest more in the supply of power that we need.

It is pure political pork, about as crispy as it comes.

Yeah, so I hate it, right? And nor does it actually help on inflation. Yeah, well, just on that point, explain that to us because, I mean, it does bring the headline rate down, right?

I mean, the government's argued that this has been an effective way of keeping a lid on inflation, but not really, you're saying.

Not really. So

the fundamental way to think of inflation

is too much money chasing too little stuff.

And

when we give these subsidies, whatever they are,

electricity, petrol, whatever it is, we're not changing the economy's ability to produce.

The amount of stuff that our dollars are chasing doesn't change. But the dollars do.
We give people more money. And that's the challenge.

You know, governments

talk the talk about

helping on cost of living as a way to fight inflation. If there were a magic wand to fight inflation, everybody would have been madly waving it.
This isn't it.

But the politics of it are really tempting. Yeah, the other problem, of course, is it costs money.
This is costing the budget, and it has since it's been in place billions of dollars.

So, extending it would cost more at a time when the budget can't really afford it. We remain in a structural budget deficit.

This week, we find out the government's now asking all agencies and departments to at least identify potential savings of 5% of low-priority stuff they could live without.

Doesn't mean it will necessarily all be cut, but at least put that forward. Aruna, what have you made of this development? So, look,

hot take:

This is just run-of-the-mill good governance, I would say. Every departmental secretary should always have a sense of

the lowest value exercises that they're doing, not because they don't have value, but because governing is a constant exercise of prioritisation. Resources are necessarily limited.

I think the particular dynamic is, you know, we've come out of this period through COVID where governments could just add on and not have to worry about taking things away.

And they were encouraged by, you know, a desire to stimulate the economy and to keep that level of public spending up.

But at some point, you do have to take stock of the full scale of what you're doing and whether you're putting your resources in the place that actually meet the government's priorities.

So, I actually don't think a whole lot of alarmism around this kind of request is warranted. This is just good governance, identifying where is the stuff that

you would reprioritise

in anticipation that at every budget, governments always want to do new and more things.

And so this is what enables you to do new and more things without just continually growing the size of spending or continually growing the size of the public service.

Yeah, but Chris, do you think this is all just normal and standard or is this a result of the growth in the public service that we've seen since Labor came in in 2022?

It has been really rapid growth. And to be fair, there have been some good reasons for it.
Some departments were understaffed.

Vets Affairs is a good example and the government's been trying to move away from consultants and towards doing stuff in-house.

So that combination was always going to be expensive, but it has been a really rapid increase in costs.

We focus on things like NDIS. Last financial year, NDIS costs rose 10.8%, but public service wage and salaries rose 10.4%.

It's now now been in the budget papers for a while. After this soaring rise in spending,

the government has been budgeting for no increase in the total dollars to be spent on wages and salaries for public servants. Now, if you're going to achieve that, then what that says is

if you still get ongoing wage growth, and they've already promised that in a variety of agreements,

then if you're only going to pay the same amount of dollars, if wages go up, then the number of jobs has to go down.

And the government has been budgeting, in fact, for more than 5% across a three-year period.

And the Parliamentary Budget Office pointed this out as well.

You are essentially budgeting for about a 10% cut in public service numbers. Now, I don't think it's going to happen.

That's effectively what the budget currently says. Is that what you're saying? That there would have to be...
a significant reduction in the headcount.

Yeah, really quite large. Again, if the dollars aren't changing, but wages are rising about 3.5% a year, well, you get three years of that.
That's more than 10%.

If you have a public service of around 200,000 people, then you are talking 20,000 jobs across three years.

This is a constant dynamic, though, that there's always at every budget a set of programs that are,

at least in the papers, meant to expire that will not actually expire. So the funding is time-limited.

And so what you see in the forward estimates is this drop-off of what's expected in terms of the future wages bill just because those decisions to renew that funding or continue that funding haven't been made yet.

So to some extent this is a continual dynamic. But look, one of the things I will say is there are better and worse ways to go about this exercise, right?

So a world where you just say, well, everyone takes a haircut and we're not going to be strategic and we're not going to think about either prioritizing or where we can really make sort of sensible savings is not a good world.

In particular, like these kind of like a swinging cut often means that that you're not investing to save.

And then in a number of areas, actually, the public service needs to be investing in capability because we've got some really thorny policy challenges that this government is going to need to tackle.

So, for instance, the NDIS has a big task ahead of it in terms of making its assessment fit for purpose. That's going to take capable people to administer that system.

So, you don't want to enact your cuts in a way that's just blind to where the relative priorities are.

That said, there are some places where we think absolutely government should be looking a bit more fiercely than others.

I mean, Grattan's pointed in the past to like defence and infrastructure procurement,

very large amounts of money spent on projects that haven't had the best history of cost control and haven't had the best discipline around initial decision making.

So there are some places where you expect the savings to be larger and others where actually maybe you need to invest to save in the future.

So finding the money to pay for all the things government wants to do currently and the things that it will want to do in the future, child, making universal child care and so on,

that remains the challenge, right, to get the budget in the shape to do all these things.

Finding some productivity in the economy that means we can have that economic growth without blowing as much steam on inflation as we were talking about earlier.

This brings us to the reform task that remains for the government. Yes, it's had a wonderful year on all sorts of fronts, politically, I think diplomatically, getting its environment laws through.

But these challenges on the budget and reform remain.

Now, talking to MPs in this building during the week, there's a bit of a view that the May budget is the point at which we have to do the tough stuff.

It gets pretty hard after that to announce, pass through the parliament, implement, bed down, any serious reform in time for the next election. Do you both agree with that?

And as participants in that economic reform roundtable 100 days ago, are you confident we're going to see some reform in this May budget? Aruna, to you first.

Look, I think that this is definitely the window to make some decisions that have to be communicated and sold to the public and have some time before the next election

to,

you know, maybe wear the pain that comes from doing something that has, there will be some losers, right? For any of these reforms, there will be people

who will not be happy. And so if you're to think about the best timing for brave reform, it is earlier when you've got a bit of time to ride out

potentially some unpopularity. And there is also, I think,

we can think a little bit about some of the reforms that were flagged,

a bit of a proof point coming. Like the Treasurer raised some expectations coming out of the round table saying, you know, we need to look at our intergenerational bargain.

We know that there's some holes in our tax system.

This is a little bit of a win-win-win. We know we need to shore up the fiscal position.

We need to prove to younger Australians that actually the government can do reforms against the interests of

wealthier Australians who could pay more.

And this is the window to do it. I think also from a macro perspective, a little bit of fiscal consolidation, so a little bit of raising taxes would help that broader task of keeping the economy

from overheating.

Because you gave Aruna the roundtable specific address on this, tackling intergenerational inequity in the tax system.

Just specifically, you're saying trusts, capital gains, tax, these are the things it needs to move on to deal with that inequity and increase the tax take?

Yeah, and look, look, I'm mindful of the fact that these things

are not at all politically easy. So it's easy to make the evidence-backed case for it, which is strong.

It's harder to actually get these things through Parliament. But

the government's got that opportunity now

and it's got some time to ride out some political discomfort on the other side. And I think that probably the sentiment you're hearing is that the closer that we get to the election,

the less we tend to see those sorts of things. It tends to happen that way.
It tends to happen that way.

Chris, we're 100 days on from what you called Canberra's Glastonbury, the economic reform roundtable.

From where you sit now, have you seen enough activity coming out of that? And how confident are you that we will see something in that May budget?

No, I haven't seen enough. To be fair, it's still too early to make that judgment.
But to the basic point, Aruna was just making it, you made it early on in this conversation.

This is a second-term government

with a very strong majority,

an opposition which seems to be

falling over.

If not now, win.

We know that

politics fundamentally falls down to doers and pleasers. Greatest speech I ever heard, advisor to Paul Keating, Don Russell

talking about all politicians are either doers or pleasers. And we've had plenty of pleasers,

but doers, we need doers.

There's all sorts of things that need to be done.

Arun has mentioned tax, I would mention spending,

regulation. There's all sorts of things that most experts would agree need to be done.
But we haven't seen much movement for 20 years. This has been a pretty timid government.

If we don't get some movement on the dial, and again, Aruna's right. First, we need to explain to the public why we need to change, and then we need to champion those changes.

There has been way too little of that, and this window is closing.

The thing I will say about

the outcomes for the roundtable is the list that was developed coming out of it was no mean feat.

Like, if you did all of the things on the the list, I get that some of those things might seem a little bit boring, but they are real reforms. A number of them have been backed up for a long time.

You know, the EPBC passed, you know, passed this week. That's an example of something that has been stalled for a very long time.

So, I don't necessarily accept the idea that there hasn't been momentum in action to date. It's just that some of these things are just like they're hard and there's a lot of grind.

And a lot of that grind happens behind the scenes, particularly the reforms that involve the states as well as the Commonwealth.

But it sounds like you're both saying this can't be a summer of just sitting on the beach for the Treasurer, for other, you know, the Finance Minister, for the Prime Minister.

They need to start thinking about then making the case for reform

before we get to that May budget, because I guess this next five or six months is going to be the critical window

if they're going to do something serious to fix the budget in this term of parliament. Just some brief final comments from you both, Chris.
Oh, absolutely.

We are almost at a phase. When Keating became Treasurer, his description is he found an Australia which knew needed to make a bunch of changes.
We knew that, but everybody said, oh, it's too hard.

Well, we're starting to head back into that. territory.
And the uptick in inflation is a reminder of all the bad stuff that comes along with an economy whose engine is clogged up.

It is just not working as well as you would like it to. We will not achieve the increases in living standards.

Governments won't have the wriggle room to do the things that need to be done and so on, unless our political system can improve on the underlying growth in productivity in the economy.

We need to take that challenge on. Yeah, look, I think that, you know, Chris has obviously talked about the economic perspective.
We often talk about that.

But I think at a more important level, Australia's democracy needs to deliver for people.

And people voted in a government to do a set of things, including some ambitious action on climate that this government's going to need to see through, ambitious action on

things like services, universal childcare health, that actually

it's not easy to meet Australians' expectations of services with the fiscal capacity we have. So I think we need to see our democracy capable of making decisions against vested interests.

And we need to see that the parliament can actually act

because the more things that get stalled, the more people start to lose faith with the system being able to deliver.

Well, I think it was John Howard who referred to the ever-receding finish line when it comes to reform.

When you're in government, that feels like the case right now after a solid year for the government, still a lot to do. Aruna Sathnapalli, Chris Richardson, great to get your thoughts.

Thank you so much. I hope you get a bit of a restful break the summer and I look forward to talking to you in in the new year.
Thanks, David. Thanks, David.

All right, and if you have any thoughts on this conversation, do drop us a line: insiders at abc.net.au. We'll have more on all of this Sunday morning.
Hope you can join us for Insiders at 9 a.m.

on ABC TV. Bye for now.

You're making us all feel very excited about being here.