Home Cartoon budget The unpleasant politics of rising costs

The unpleasant politics of rising costs


While rising prices flatter the budget outcome thanks to range drift and nominal income gains, Chalmers’ ability to help households struggling with bills is limited by the need to avoid adding more fuel fire.

On top of all that, the Reserve Bank of Australia is expected to raise interest rates on Tuesday for the seventh consecutive month. Unions are on the rise again, with Labor Relations Minister Tony Burke poised to ram through Parliament multi-employer bargaining rights that business groups say will cost jobs, cripple supply chains and disrupt people’s lives.

Overturn the status quo

There are two figures that have most upset the post-election political status quo this week. The first was Wednesday’s Australian Bureau of Statistics report showing the consumer price index jumped 7.3% in the September quarter from a year earlier.

Not only does the fastest inflation in 32 years suggest that inflation is more entrenched and stronger than market economists had expected, it also raised doubts about the Treasury’s prediction – released less than 24 hours earlier – that inflation will not exceed 7.75% this quarter. That means Tuesday’s rate hike is unlikely to be the last.

RBA Governor Philip Lowe is expected to raise interest rates next week. Alex Ellinghausen

The second major event was the budget forecast that energy costs will increase by 20% in the second half of this year, followed by 30% until mid-2024, pushed up by the war in Ukraine, the failing coal-fired power stations and the lack of cheap gas.

Both figures threaten to drag the country back into ‘climate wars’, banned Prime Minister Anthony Albanese said when he won in May as the Liberal Party was swept from power by the teal wave.

Opposition Leader Peter Dutton crystallized this reality with his budget response speech, which he used on Thursday night to slam Labor for breaking promises to cut electricity bills and rushing to kill coal and gas before new technologies are developed and deployed.

“When the Prime Minister says the sun and the wind are free sources of energy, your electric bill tells a different story,” Dutton said.

High inflation and energy bills are not just an easy slogan for the Coalition. They are making life more difficult for Climate Change and Energy Minister Chris Bowen on issues such as industrial emissions and resource reforms, known as the safeguard mechanism.

Although he has the broad support of the business community for the changes, they will increase cost pressures in the short to medium term for households and industry.

The Greens will continue to demand greater action against the gas companies in Bowen’s ongoing safeguard mechanism review, which he will be loath to do. On the other side, the Coalition will oppose anything that has the slightest hint of inflation.

Pradeep Philip of Deloitte Access Economics says we see the price of a disorderly transition. Olive+Maeva

“We see the price of a disorderly transition,” says Pradeep Philip, senior partner at Deloitte Access Economics. “Part of this award reflects the past. Some reflect the present, especially the war in Ukraine.

“And some of them tell us that the cost of the transition is far from zero.”

Philip says one of the main causes of the spike in energy price forecasts is “because we’re trying to do a lot, spend a lot, in a shorter time frame.”

This increases the cost of the transition for the economy and increases the risk of a mismatch between supply and demand. “Reform is politically difficult because the benefits are always late. But if we don’t reform, we will have problems.

Intervention in the energy market?

Immediate political attention is increasingly focused on what form of intervention in the energy market the Albanian government should pursue. Most options are difficult or compromised, with unpleasant side effects.

Whether they have chosen a price cap, gas reservation, export controls, Petroleum Resource Rent Tax (PRRT) adjustments or a super profit tax, the solutions can either take too time to drive prices down, make the inflation problem worse, force the government to pick winners and losers, scare off foreign customers, or shift the whole problem onto the federal balance sheet.

European and UK governments are writing blank checks to cover their citizens’ energy bills this winter, embedding new uncapped tax risks that were at the heart of Liz Truss’ humiliating disappearance.

The seemingly populist option of imposing price caps on energy companies has alarmed existing energy producers as much as those wishing to stimulate investment in the new post-carbon economy. What is the incentive to take risks on solar and wind energy capacity if the government limits the increase?

But these difficulties do not mean that the gas and energy companies are off the hook. Federal Labor has made it clear that it needs energy providers to be part of the solution to lower prices.

If energy bills become even more politically intolerable for Labour, gas companies should not be surprised if the government takes drastic action. Prime ministers will always put their own political survival ahead of a foreign corporation.

New fault lines

Meanwhile, Friday’s meeting of federal, state and territorial energy ministers highlights new fault lines. New South Wales Treasurer Matt Keane is calling on Canberra to bail out households in his state for rising energy prices, a suggestion that has infuriated some federal Labor given the government’s dismal failure to New South Wales to unlock new gas supplies.

South Australia’s energy minister has threatened to withhold gas to NSW, while WA premier Mark McGowan urges east coast manufacturers to move west, where prices were significantly lower thanks to a domestic gas reserve of 15%.

Around the world, inflationary pressures are putting enormous strain on governments, eroding good policy-making and turning resource allocation into a game of hunger.

President Joe Biden’s presidency could be just over a week away from becoming irretrievably stalled if Republicans manage to sweep the Senate and House of Representatives in an election dominated by the faltering economy and runaway inflation.

So far, the Albanian government has done a good job in this week’s budget in managing the difficult hand of inflation that has been dealt to it. Chalmers resisted calls to spend “windfall” revenue increases and set the stage for a broader set of economic reforms.

“They avoided the temptation of what we’re used to, which is budgets with lots of sugar shots,” says Deloitte’s Philip.

“The global economy came to Australia’s rescue again, and they bet that improved revenue on the bottom line. But the past years show that the structural problems of spending in the budget persist.

In another echo with today’s politics, the Coalition ran its 1975 campaign on cost-of-living issues that contrasted with Labor outrage over Whitlam’s dismissal.

“We were performing ‘turn on the lights’ and they were performing ‘Shame Fraser Shame,'” Taylor explains. “You’re a mean person getting rid of Gough Whitlam, whereas ‘turning on the lights’ was much more pragmatic.”

Albanese knows his Labor history and the reasons for the chilling loss of Whitlam in 1975. He will do whatever it takes to prevent it from happening again.