Jim Chalmers Labor sets up Philip Lowes RBA for recession blame game

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On Friday, Anthony Albanese reminded people of Lowes’ misdirection that there would be no raise until 2024.

The Treasurer has moved significantly away this week from Lowes’ 12th interest rate hike to 4.1%. Chalmers sympathized with voters, saying the bank’s decision was difficult to understand and hard to enforce.

The job of reserve banks is to crush inflation without crushing the economy, Chalmers said.

And they will of course have plenty of opportunities to explain and defend the decision they have made.

My job is different.

Chalmers verbalized Lowe saying the governor said raising the minimum wage did not raise interest rates.

In fact, Lowe said the Fair Work Commission’s 5.75% wage increase for about a quarter of the workforce on minimum wage and paid workers was just one factor. Tuesday’s decision, with high inflation, federal and state wage increases and rising house prices.

[The 5.75 per cent rise] was higher than what we factored into our forecast, Lowe said.

Pandemic stimulant

How much this adds to inflation outcomes really depends on its spread to other parts of the labor market.

Ironically, Lowe would have welcomed the Labor policies of the past decade as the economy struggled to generate inflation and wage growth. No more.

Granted, Labor did not cause the inflation problem, which is largely due to too much pandemic stimulus under the Labor-backed coalition government and supplemented by the war in Ukraine which has driven up prices Energy.

But arguably Labor should do more to help the RBA fight inflation through a tighter budget and curb its push for higher wages that are not linked to productivity increases.

Chalmers says that the central objective of budgets is inflation.

The budget is arguably broadly neutral, as evidenced by the RBA and the Treasury.

But in extraordinary times, when inflation is high at 7% and a new government has political capital, discretionary fiscal policy should be tighter to better support monetary policy. Deeper spending cuts or temporary tax hikes would make it easier for RBAs.

Moreover, Chalmers refused to support the governors’ call for wage moderation.

Unlike his hero Paul Keating, Chalmers rarely, if ever, says anything that could jeopardize his standing with the rank and file of Labor progressives and unions. He wants to be a future Labor leader.

If the government is serious about helping the RBA avoid recession, fiscal and wage policies need to focus more on cooling the economy and boosting productivity to achieve an economic soft landing.

Many will naturally blame the RBA in the event of a recession, but the reasons will be complex, dating back to the overreaction of health and economic officials to COVID-19 which caused a massive supply and demand imbalance in the economy.

Now Australia needs all arms of macroeconomic policy working in the same direction.

As the Treasurer plans to replace Lowe when his seven-year term expires in September, Chalmers said Tuesday his goal is to find the best person to lead the Reserve Bank into the future on the path proposed by the RBA review.

But with tabloid reporters and photographers camped outside Lowes’ home and golf club, and mounting pressure on the governor from borrowers and politicians, who would want to be the governor to face the blame?

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