Jim Chalmers flags deal on Reserve Bank’s new structure is close

Cost of living remains at the top of people’s minds as inflation stays sticky. With an election in less than a year, the government has been doing what it can to address some of the pressures. But the Reserve Bank doesn’t envisage an interest rate cut this year, and has suggested spending by governments is keeping inflation higher for longer.

On Thursday, new figures showed employment has surged, but the unemployment rate ticked up to 4.2%, from 4.1%

Treasurer Jim Chalmers joined the podcast to discuss a range of issues.

Chalmers is optimistic he is close to a deal with the opposition over his long-awaited reforms to the Reserve Bank. The plan is to have two boards rather than one: There would be a new board of experts to take over responsibility for monetary policy.

We’ve had discussions, including relatively recently, about how we come to a bipartisan view about these reforms. I’ve done my best throughout to be as bipartisan as I can because I think the structure of our central bank should be above partisan politics. And I believe [shadow treasurer] Angus Taylor has that view as well.

There are a couple of issues that we’re still working through. […] Hopefully we can progress things quite soon and get it finished so that the changes can come in at the start of next year.

Bank Governor Michele Bullock’s recent comments about strong government spending, and the observation by the bank’s chief economist Sarah Hunter that the economy was running a “bit hotter” than the bank previously expected sparked headlines about the government and the bank being at odds. Chalmers is anxious to stress what they agree on but firmly rejects the suggestion of the economy being hot:

The Reserve Bank governor and I both say in our own way that we’ve got the same objective here, which is to fight inflation, but we’ve got different responsibilities. Governor Bullock acknowledged that in her speech in Armidale. We both want to see inflation moderate, further and faster. I’m an enthusiastic part of that.

I’m not sure that there’s the data or the feedback to sustain an argument that says that the economy’s too hot. There was barely any growth in the most recent national accounts. Household savings came off substantially. Retail has been weak. You know, there are a whole bunch of indications that our economy is quite soft.

On the lacklustre reception of the budget, Chalmers says he keeps his expectations realistic, and he remains confident he’s made the right economic decisions:

I’ve been around long enough to have realistic expectations about all of that.

I think it’s important to acknowledge people are under pressure and when they’re under pressure, they express themselves and the political system.

That’s expected and unsurprising. I genuinely think that if you make the right economic decisions for the right economic reasons, the politics will take care of themselves. If not in the near term, then certainly over the longer term.

On the latest employment figures:

Well, employment’s gone up by more than unemployment. The unemployment rate has ticked up because of participation rates at a record high. The labour market is soft around the edges.

The participation rate is up. The amount of new jobs just in one month, just in July, was almost 60,000 new jobs that are all full time. That’s a really good thing in the context of an economy which is soft and weakening more broadly.

Although real wage growth is sluggish, Chalmers highlights the government’s record on wages especially on the gender pay gap:

We’ve had a particular focus on people on low and middle incomes and a particular focus on women, and one of the most heartening aspects of the labour market data this week has been that the gender pay gap is the narrowest it’s ever been in the history of our country. […] That’s not accidental. That’s deliberate.

E&OE TRANSCRIPT

PODCAST INTERVIEW POLITICS WITH MICHELLE GRATTAN THURSDAY, 15 AUGUST 2024

SUBJECTS: Inflation, interest rates, cost-of-living relief, housing, Reserve Bank reforms. MICHELLE GRATTAN: Jim Chalmers is our guest today. Jim Chalmers, in her words, bank chief Michele Bullock has suggested that public spending, federal and state, is one of the factors keeping underlying inflation higher for longer. Now, the government seems to be contesting both what Bullock is saying, while also claiming that there is no difference between the government and the bank.

JIM CHALMERS: I think it’s helpful to begin with where we agree. The Reserve Bank Governor and I both say in our own way that we’ve got the same objective here, which is to fight inflation, but we’ve got different responsibilities. Governor Bullock acknowledged that in her speech in Armidale. We both want to see inflation moderate further and faster. I’m an enthusiastic part of that, delivering a couple of surpluses and the helpful way that we’ve designed our cost-of-living relief. But I’ve also got to fund the health system, I’ve got to fund the cost-of-living relief that we are rolling out. And that just goes to the fact that we’ve got the same objective, we want to get on top of inflation, but we’ve got different responsibilities. When it comes to public spending, I don’t think anybody seriously suggests that government spending in a budget is the primary determinant of prices in our economy. We’re talking here about a net additional spend of about $10 billion in the context of a $2.6 trillion economy. There are a lot of other factors which are feeding inflation. Inflation has come off substantially since we came to office, but it’s still a bit too sticky and stubborn and too persistent, and there’s a range of reasons for that, some of them are international, some of them are domestic, and public spending is not the primary determinant of that pressure that we have still in our economy.

GRATTAN: So, you stress the areas of unity between the government and the bank, but what do you see as the differences?

CHALMERS: I think the main perspective that I tried to add last week was in relation to this sense that the economy was running too hot. And I think it is difficult to sustain an argument that the economy is running too hot.

GRATTAN: And another bank official put that to a parliamentary committee.

CHALMERS: And when the Reserve Bank says that we’ve made progress on inflation, as they did in their statement, but it’s still too persistent, we agree with that. I say that in my own way, I’ve been saying that for some time. I’m not sure that there’s the data or the feedback to sustain an argument that says that the economy is too hot – there was barely any growth in the most recent national accounts, household savings came off substantially, retail has been weak. There are a whole bunch of indications that our economy is quite soft and people are under really substantial pressure. And so our job, our job, meaning my job and also the Governor’s job is to fight inflation together, but to do that in a way that doesn’t smash the economy and doesn’t smash jobs. And in that light, we saw the unemployment rate tick up again this week, but even at the same time as we’re creating tens of thousands of new jobs, and that’s a reminder of the sorts of risks that we need to balance as we go about this primary fight against inflation.

GRATTAN: So, they’re just wrong on this too-hot argument, do you reckon?

CHALMERS: Look, I don’t use that kind of language. I was asked in the course of media interviews last week, did I think that the economy was running too hot? I think that’s a position which is difficult to sustain in the data. But their view, which is in their statement, they put out after their decision to keep rates on hold, their view is that inflation has come off really considerably, but it’s still too persistent, that’s our view as well.

GRATTAN: Governor Bullock has also said that demand in the economy is still elevated in relation to supply. Do you agree with that?

CHALMERS: I think it depends how you measure it. One of the things that I look at is in those most recent national accounts, there was almost no discretionary spending. Discretionary spending has been incredibly flat, historically flat in some ways, and that to me is an indication of just how tough people are doing it. I don’t think that people have a lot of spare cash lying around. That’s why our cost-of-living relief is so important. I agree with the Reserve Bank that we’ve got more work to do to see inflation moderate further and faster, but I think we need to do that recognising the economy is really quite soft and quite weak, and people are under a lot of pressure.

GRATTAN: So, you see the problem in this equation on the supply side. So, why do you think we’re having such trouble in meeting the supply constraints, getting rid of the supply constraints, especially in the labour force?

CHALMERS: There are issues in the labour market, there are issues in the housing market that we’re trying to fix. There are international factors as well. This inflation challenge has been with us for a while. As you know, you and I have spoken about it on a number of occasions. It peaked a couple of years ago, inflation’s now less than half what it was at its peak a couple of years ago. But the composition of the challenge has changed over time. And so now we’ve had some issues in the fruit and vegetable market. Obviously, there’s been volatility in the petrol price because of events in the Middle East. Insurance is a challenge, rent is a challenge. And so our job, whether it’s on the supply side or on the demand side of the economy, is to try, and my job in the government, is to try and provide that cost-of-living relief in a way that helps rather than hampers the fight against inflation. And I’m really confident that we’re doing that at the same time as we’re working on some of these supply side issues.

GRATTAN: But the supply side issues seem intractable.

CHALMERS: I’m not sure about that. They’re difficult, they are thorny issues. Partly because some of them are determined in the world and we have to respond to them, but others are challenges longstanding, housing supply, obviously, is a big, long-standing challenge, a big priority for us to try and turn things around over time. And so I don’t know that they are intractable, but they’re difficult, and that’s why they are a big focus for us.

GRATTAN: The bank revised up its estimate of public demand. Is public demand do you think, that is spending by governments, state as well as federal, one of the reasons why demand is exceeding supply? And do you think that federal and state governments are spending too much in the present situation?

CHALMERS: I’m happy to repeat what I’ve said before about state governments, and that is they are doing what they can to try and help people with cost-of-living pressures like we are. My focus is on my job, not their job, and my job is to provide that help in a way that’s substantial and meaningful, but also responsible, and that comes down to the design of it. But even if you think about the public demand that you’re talking about, yes, the bank revised their forecasts for public demand to about 4 per cent in the June quarter. That is lower than the average under our predecessors, which was 4.7 per cent. And since the election, public demand has only been about 3.2 per cent. So, public demand under us has been lower than what we saw under our predecessors, inflation was higher under our predecessors. We have shown substantial spending restraint, and where we have had to make new investments, they’ve typically been either in unavoidable areas, health, medicines, or in cost-of-living relief. And I think in both of those instances, not just defensible spending, but absolutely vital spending in the circumstances.

GRATTAN: You spoke a lot in your early days as Treasurer about those big, big spending areas where savings had to be made, health, NDIS, defence and so on. Are you satisfied with the pace of those savings being achieved?

CHALMERS: The big five, as you’d recall, are health, aged care, the NDIS, defence, and interest costs on debt. We have made really quite extraordinary progress on interest costs on debt. The cumulative improvement to the bottom lines has been $215 billion I think, from memory, turned two big Liberal deficits into two big Labor surpluses. That saved us on debt, that saved us on interest costs. So, on that one, heaps of progress, perhaps even more progress than we’d even contemplated a couple of years ago, very good progress. NDIS, obviously, a lot of efforts going into that I commend, salute Minister Shorten for his efforts there. Aged care, we need to establish an element of bipartisanship, I think, on aged care, given how long the timeframes are, for obvious reasons. Defence, we’re making sure we’re paying for these new commitments in the most responsible way. And health, we make no apology for investing more in Medicare and more in cheaper medicines, because that’s even more important in the context of an ageing population. So, we are making good progress on those areas of spending. We’ve tried to do the right and responsible thing. We’ve tried to show restraint where we could, and we’re reforming the system where there’s a benefit for the economy and for the budget over the medium and longer terms.

GRATTAN: The Bank Governor flagged recently that interest rates are not likely to be cut for at least another six months. Were you disappointed at that timeline? Did you expect that it would be better than it’s turned out to be?

CHALMERS: A couple of things about that. I mean, I don’t really want to kind of parse a full Governor’s press conference and I didn’t comment on Governor Lowe’s forward guidance and I don’t intend to comment on the indications that Governor Bullock has given. I think in fairness to Governor Bullock, she also acknowledged an element of uncertainty in the forecasting, which we have as well. There is always an element of uncertainty when forecasting -

GRATTAN: You mean hope is alive?

CHALMERS: No, I really just mean I heard Governor Bullock acknowledge that there’s a lot of uncertainty in the global and domestic economy. Treasury and the Reserve Bank do the best they can when they forecast the conditions over the coming months and years, I think Governor Bullock acknowledged that. But I don’t intend to second guess the guidance that she’s giving people about her thinking and the board’s thinking about the rest of this year.

GRATTAN: What about next year? Would you still be hoping for a rate fall before the election?

CHALMERS: Well, again, and I think this is pretty consistent, we’ve had a number of conversations about this while I’ve been Treasurer and probably before that as well Michelle, I don’t try and make predictions, I don’t try and pre-empt or engage in a running commentary on the future trajectory of rates. My job, and I take responsibility for my part of the job, is to be a useful partner in the fight against inflation and we’ve made really good progress together. Governor doing her job, me doing my job, which is get the budget in better nick, provide cost-of-living help in the most responsible way that we can, and because of our combined efforts, we’ve gone from inflation having a six in front of it at the time of the election, and now got a three in front of it. And we all acknowledge we want it to fall further and faster from here.

GRATTAN: Just looking back to that budget, you did give quite a lot of cost-of-living relief. You must be pretty disappointed that it doesn’t seem to have gone down better with people, that they’ve just sort of taken it and said, well, of course we’d expect that, and moved right on and marked the government pretty low in the opinion polls.

CHALMERS: I’ve been around long enough to have realistic expectations about all of that Michelle.

GRATTAN: You must have thought it would be better, the response?

CHALMERS: I’m not sure that I did. I think it’s important to acknowledge people are under pressure, and when they’re under pressure, they express themselves in the political system, and that’s unsurprising. That’s expected and unsurprising. I genuinely think that if you make the right economic decisions for the right economic reasons, the politics will take care of themselves. If not in the near term, then certainly over the longer term.

GRATTAN: How long’s the long term? Now the government’s made a lot of its commitment to lifting real wages, and you said that’s a priority. But in the June quarter, price rises were ahead of wage rises. By the time of next year’s election, will you be able to tell people that real wages have gone forward?

CHALMERS: Well even in that most recent data, I’m not disputing your interpretation of the quarterly number, but usually people rely on the annual number. And in annual terms, there has been real wages growth. Actually, for three consecutive quarters, there’s been real wages growth. And we’ve seen nominal wages growth of 4 per cent or higher four times, and it never happened once under our predecessors; they never got nominal wages growth to four. Real wages growth was falling by 3.4 per cent when we came to office, now in annual terms it’s growing again. And that’s obviously a really important part of our economic plan and our economic objectives, because people were suffering from stagnant wages for the best part of the wasted decade under our predecessors and we’ve been trying to turn that around. We’ve had a particular focus on people on low and middle incomes, and a particular focus on women. And one of the most heartening aspects of the labour market data this week was that the gender pay gap is the narrowest it’s ever been in the history of our country. We’ve got more to do there, but it’s the narrowest it’s ever been. And that’s not accidental, that’s deliberate, the fact that that gender pay gap is narrower now than it’s ever been. And so, I think we will go to the people with a very compelling story to tell about our efforts on pay, on wages. One of our reasons for being is to ensure that there are more people working, more people earning more, more people keeping what they earn. We know from the fact we’ve created almost a million jobs on our watch, which is a record. We know from the wages data and we know from the tax cuts that we’re ticking all three of those boxes. More people working, earning more and keeping more of what they earn.

GRATTAN: Well, on employment, we had the latest data today and that showed that employment’s gone up and unemployment’s gone up. What do you take out of it?

CHALMERS: Well, employment’s gone up by more than unemployment. The unemployment rate has ticked up because the participation rate is at a record high. The labour market is soft around the edges. We’ve seen the unemployment rate come up from three and a half, middle of last year, to 4.2, we acknowledge that. Job ads have been weak, eleven of the last twelve months they’ve gone down. But at the same time, we’ve created a record number of jobs in this parliamentary term, almost a million new jobs created, and that’s because participation’s up. And so sometimes people find it hard to kind of fathom why is the unemployment rate going up at the same time as all these new jobs are being created and that’s because the workforce is getting bigger, the participation rate is up. The amount of new jobs just in one month, just in July, was almost 60,000 new jobs that are all full time. And that’s a really good thing in the context of an economy which is soft and weakening more broadly.

GRATTAN: So, we’re going to see, however, further rises in the unemployment rate?

CHALMERS: That’s anticipated in the Treasury forecasts, and I think in the Reserve Bank forecasts as well. That’s been the case for the last few updates. There’s been an expectation that the unemployment rate will tick up. And so that is happening more or less as expected. But what’s been the really heartening thing is that we are still creating a lot of new jobs, even in the context of an economy which is soft and an unemployment rate which is rising.

GRATTAN: Can we go back to this question of housing? You’ve got this target of 1.2 million new homes over five years, and yet the number of houses being built is running well behind the number that you would need to meet that target if things were going along on an even rate. Are you expecting a dramatic acceleration as you go through this period or what can you do to up the performance?

CHALMERS: The housing pipeline is not what we need it to be. That’s the key motivation for the $32 billion in Commonwealth investment that Julie Collins secured as housing Minister, that Clare O'Neil is now responsible for as the new Minister. We acknowledge that the pipeline is not what we need it to be. Our target is ambitious but achievable, but only if everyone does their bit and what we’ve shown is a willingness to invest Commonwealth money and Commonwealth effort -

GRATTAN: - but it doesn’t seem that money’s enough.

CHALMERS: Well, to be fair, Michelle, we are in the second month of a five year target. We have acknowledged, and I think Clare has, Julie before her, and I have acknowledged it’s going to be really hard. It’s going to be really, really hard. But we can do it if everyone does their bit, we’re prepared to do our bit. We need the states, local governments, the industry, the investors and others to help us meet this target. We don’t have enough homes that’s why rents are too high, it’s why it’s too hard to get a toehold in the market as a homeowner. There’s a lot of Commonwealth money committed, I’m proud of that.

GRATTAN: So, should there be more stick applied to the states who are getting that money?

CHALMERS: I think the states are really willing partners, all of them. But I shout out in particular our counterparts in NSW. I mean, I think everybody recognises that we need to do more and sooner. We can’t build 1.2 million homes overnight. We’ve got a lot of work to do. There’s a lot of willingness and dedication and commitment, and if we all do our bit, we’ll get there.

GRATTAN: On the immigration issue again, the latest indications suggest the number of net arrivals may not be falling as sharply as was anticipated. Isn’t this just going to add to the pressure on the economy of housing and labour shortages?

CHALMERS: Well, first of all, even with that pressure that you mentioned in your question, which I acknowledge, there has still been a substantial drop since that peak not that long ago. We expect it to continue to fall, but there are a lot of students, a lot of long term tourists and others, which has put upward pressure on that number. Our job is to manage that in the most responsible way that we can and we’re doing that, and build more homes and we’re doing that too, and build infrastructure, we’re doing that as well. We know that this is an issue that needs to be carefully managed and that’s why we’re carefully managing it.

GRATTAN: Let’s go back to where we started and talk about the bank. You had a number of reforms of the bank, including the proposal to have two boards, to split the boards into two, with one, a specialist monetary policy board. And yet you haven’t been in a position to get that legislation moving through the parliament. Where are you up to there?

CHALMERS: I hope my counterpart, the Shadow Treasurer, doesn’t mind me saying that we’re still engaged in discussions about that and we’ve had discussions, including relatively recently, about how we come to a bipartisan view about these reforms. I’ve done my best throughout to be as bipartisan as I can because I think the structure of our central bank should be above partisan politics. And I believe Angus Taylor has that view as well. I hope he does, I believe he does. So, we’ve been in conversation, wherever there’s been a 50 50 call I’ve tried to go with a view that they prefer, and that’s because that’s a demonstration, I think of my willingness to get a bipartisan agreement. There’s a little bit more work to do.

GRATTAN: What’s outstanding at the moment?

CHALMERS: I don’t really want to get into the details of it because I don’t want Angus to think that I’m conducting this conversation in a public way. I’m trying to be respectful to him. There are a couple of issues that we’re still working through, but I think we’ve shown with the, probably guessing, probably half a dozen issues that we’ve been grappling with in earlier conversations, we’ve come to a position that I think that they are happy with. We’ve shown a willingness to do that. We’re trying to do that with the last couple of outstanding issues as well, and hopefully we can keep things moving. My preference was to pass it earlier in the year. Unfortunately, there was a vote where our counterparts in the Senate pushed it off into a committee, which I thought was unnecessary. But you play the cards you’re dealt in the Senate, you do the best you can. I’m genuine when I say I want a bipartisan outcome here, and that’s what I’m working towards.

GRATTAN: So, when do you think you might land something?

CHALMERS: I’m not sure. There’s a lot of effort going in right now.

GRATTAN: Did you talk this week, for example?

CHALMERS: Didn’t talk this week, but have spoken quite recently. And that’s because I take his feedback and his views seriously, and we try and progress where we can and come to a common landing point. Hopefully we can progress things quite soon and get it finished so that the changes can come in at the start of next year.

GRATTAN: Jim Chalmers, thank you very much for being with us today. And that’s all from today’s Politics podcast. Thank you to my producer, Ben Roper. We’ll be back with another interview soon, but goodbye for now.

ENDS