If you have a mortgage, own a small business or you’re an investor, the next few months are going to test your hip pocket. Treasurer Chalmers is staring down a triple whammy, and the May 12 Budget is where it all comes to a head.
The starting point for any Treasurer before a budget is to have a handle on the economy that lies ahead. And for Jim Chalmers life as a Treasurer has been made more difficult because of the Middle East war and one Donald Trump.
In fact, I have certain sympathy for him, as I have to work out how I invest my clients’ money, as well as my own. And I know the economists in Treasury have never studied what’s needed nowadays to make confident economic and investment decisions — Trump 101.
As the recent Ayatollahs of Iran have found out, this guy is a human curve ball. Hitting the hip pocket ‘ball’ out of the park for treasurers, CEOs of companies, small business owners, investors and consumers has become a real challenge.
Remember if we eventually see inflation rise so high that we get two or even three rate rises, the Iran-war-created inflation will have a big part in such a painful story. Struggling families in the mortgage belt need to prepare for this if this war drags on and petrol prices drive up inflation to intolerable levels for the RBA.
If a small business experiences bottom line losses or goes broke because diesel is now over $3 a litre and oil-related costs are going through the roof, then a Trump decision is behind that.
Before February 28, when the US stepped into the Middle East madness, we were looking at a Goldilocks scenario for the US economy and stock market, of a good economy, a positive stock market, the expectation of two interest rate cuts and a President opposed to wars and with an agenda to reduce taxes, as well as excessive regulations.
This would have been a plus for the Australian economy, that still had an inflation battle to deal with, but the economy was positive looking.
But now this is what the SMH reports Treasurer Chalmers is telling us about his team’s assessment of our economy going forward, and it’s not great news: “We do expect inflation to be higher, we do expect growth to be slower, and slower growth typically, not always but typically, means higher unemployment,” he said. “That’s what we’re dealing with to be upfront with you.”
That’s a triple whammy for us, the economy and the Treasurer ahead of the May 12 Budget and it comes as economists are warning that his budget deficit is way too big at $36.8 billion. This has been a product of generous tax cuts for cost of living offsets, such as energy rebates, that were both socially and politically driven. There were also a number of out-of-control policies, such as the NDIS, and there has been an explosion of public servants, with around an additional 41,000 being recruited since 2022, when the first Albanese Government was elected.
Now in a slowing economy, Chalmers has to find savings and it’s why we are hearing about changes to the capital gains tax discount, maybe negative gearing and any tax concession that typical non-Labor voters could be making money out of!
The Treasurer has to find money and with petrol prices sky high and interest rates set to rise, only a recession could stop these expected rate rises, but that would mean higher unemployment, which is a vote-killer under most election scenarios.
The big question no one seems to be addressing is: will any changes to the capital gains tax discount also apply to shares?
Chalmers hasn’t publicly talked about this issue, but it could be a big influence on what happens to share prices and the returns of super funds.
Most budgets bring sensational headlines but this one in 21 days’ time could bring blockbuster banners for newspapers and media websites. It has to show the Treasurer pulling a rabbit out of his hat to satisfy the RBA, which expects spending restraint or else it will increase interest rates higher than any of us want them to be, apart from savers. However, he needs to minimise the number of voters who might hate him on May 13 when they wake up and read how he plans to hit those he thinks have had it easy, tax-wise.
It’s at times like these, when poor local government policy decisions have met an unusual US President, who has put economic stress on our economy via war, the words of former US President Ronald Reagan come back to me. He once observed: “Government is like a baby. An alimentary canal with a big appetite at one end and no responsibility at the other.”
I hope Treasurer Chalmers shows himself to be a treasurer who’s more economically inclined rather than someone who’s just a politician.
Chalmers performance, thus far, is not encouraging.