Analysis of recent political and economic uncertainty

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The government is having to walk some fine lines at the moment. Three weeks ago, announcing Labor’s migration policy, Tony Burke was keen to stress that the housing supply problem was not caused by immigration. But, he said, immigration was part of the answer.

Then last week deja vu – as Jim Chalmers, seeking to get ahead of Tuesday’s interest rate rise, leaned away from suggestions government spending was driving up inflation. At the same time, he recognised there was “more work to do” on cutting spending.

Are the two ministers contradicting themselves? No – in fact, both have legitimate cases. Burke squared his circle by arguing the major factor that changed was not immigration but the fact Australians, post-pandemic, wanted to live with fewer people. So immigration, which has recently fallen, wasn’t the cause – but cutting it could now help. Similarly, Chalmers’ argument effectively is that Labor has been cutting spending as quickly as is responsible in a changing environment. The fact more can be done doesn’t automatically mean that more should have been done already – especially given the fact nobody knew how events in Iran would play out.

You can disagree with both men on the numbers involved – there are plenty who think both migration and spending should be lower than they are – but there is nothing wrong with the fundamental logic. Still, you can see from the nuances involved how delicately balanced the current political situation is.

There is an old political adage that when you are explaining, you are losing. That probably goes double for an environment as feverish as this one.

You could observe this fever in the overwrought media response to the Reserve Bank governor’s comments following the rate hike. Much coverage suggested Michele Bullock had dealt the government a significant blow by pointing to the fact that inflation “has been driven by domestic capacity pressures”, added to by events in the Middle East.

But how could she have said otherwise, given the fact – which she pointed out – that interest rates began rising before the Iran war? Chalmers, it should be noted (as Barrie Cassidy did) had been careful in interviews before the hike to stress the Middle East had made an existing inflation problem worse – precisely what Bullock then said. “Much worse” were the words both used.

Bullock’s point is an important one because if Iran were resolved tomorrow, it would be dangerous for people to simply assume inflation was fixed. There are clearly inflationary pressures that are not to do with Iran. That is not the same thing as Bullock pinning it all on government spending.

Remarkably, while all this reading of tea leaves was going on, more direct messages from Bullock went largely ignored. Asked about productivity, she made three clear recommendations. Regulations should be loosened so that financial institutions could more easily lend money to businesses. And she said this: “it’s also incumbent upon businesses to take opportunities to improve productivity … we are a little bit further from the frontier, the dynamic frontier, than other countries … So businesses need to step up to the plate as well.”

Her other recommendation was that journalists ask the Productivity Commission chair, Danielle Wood. Really, she was just pointing out the appropriate person to ask. Still, it’s worth noting that Wood, like Bullock, has been arguing businesses could do more, saying that on AI we “need businesses willing to take a swing”. It’s not the only area of convergence. Wood has been saying we should loosen housing regulations – and this, too, was something Bullock was quite direct about in her press conference, saying governments needed to continue working to encourage higher-density housing.

Wood has made many other points, some of which get overlooked. She has emphasised the gap between advantaged and disadvantaged school students – something you’d hope a country priding itself on “the fair go” would care more about. One of her most important points is that acting on productivity now is a “game of inches”. As she says, those inches can add up – but the truth of making a difference is that lots of smaller actions are needed.

This doesn’t let the government off the hook – the Commission has plenty of recommendations for Labor (including doing more to challenge the cosy oligopolies in this country, another thing business and its backers in the press don’t like to talk about). But it undermines the current strain of debate implying Labor should fix productivity this minute.

Which brings us to the other big demand being made of Labor right now: that it act immediately to fix inflation by cutting spending. But here, too, there is nuance. Bullock, in her press conference, leaned quite heavily on the fact that rate rises take a while to filter through the economy – between 12 and 18 months. We would have to wait to see what this latest one did.

In its immediate aftermath, last week’s rate rise felt like a tipping point in politics and the economy. My immediate suspicion was that voter glumness would now turn more decisively towards anger. But I am keeping in mind too, that sometimes in politics, the eye-catching event happens a little after the actual matters of substance have occurred. As Matt Wade wrote in this masthead, we are witnessing a very strange mixture of conditions: another rate rise amidst low growth and rising unemployment. If the Reserve Bank’s rate increases are now spreading through the economy, then a government suddenly making drastic cuts risks reacting to old conditions that have already changed.

Nobody knows which situation we are in. Perhaps anger is about to spread. And perhaps another rate rise will be needed, making people angrier still. Or perhaps inflation is heading down, the economic and political situation already shifting in ways invisible to most of us (and who knows what will happen in Iran). This is an environment of enormous uncertainty, with risks in every direction. The government will keep on trying to explain itself, to get across the nuance. That uncertainty is what makes the nuance necessary – and also makes such nuances almost impossible to get across, through the shouting, fear and fever that dominate this moment.

Sean Kelly is a regular columnist. He was an adviser to former prime ministers Julia Gillard and Kevin Rudd.

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