After navigating through eleven Treasury-related bills in this week’s session of Parliamentary whack-a-mole, Jim Chalmers paused to acknowledge his own efforts.
“Tax reform, housing, super objectives, Future Made in Australia, consumer safeguards for buy now, pay later, competition policy, achieving better deals for shoppers, and the Reserve Bank reforms too,” he listed off.
“This is what progress and delivery look like. We’ve concentrated primarily on addressing the cost of living and combating inflation while simultaneously keeping the wheels of economic reform in motion.”
To make a significant impact on everyday Australians and give Labor a fair chance in the upcoming election, those reforms will need to be substantial.
People are primarily looking for relief from rate increases.
As the news continues to announce delays in rate cuts, other countries are seeing mortgage relief.
Recently, New Zealand implemented a substantial half percent cut and is promising more adjustments next year. The US Federal Reserve and the European Central Bank have also decreased rates by three-quarters of a percent this year, having previously raised their rates even higher than the RBA.
The fact that rates are declining overseas is a bitter pill for debt-laden households in Australia, who continue to tighten their belts.
Australia seems increasingly lagging behind its global counterparts, with household disposable income per capita falling and showing that Australians are financially worse off than before the pandemic. In contrast, the US and most of the OECD countries are making noteworthy economic progress.
To avoid short-term pain, Australia refrained from raising rates too aggressively to maintain what now appear to be unsustainable jobs, used immigration to boost GDP at the cost of housing, and neglected to curb excessive government spending on programs such as the NDIS.
Young people are particularly bearing the brunt, with 18-29 year-olds reducing their spending more than any other demographic, while young families aged 30-39 have also scaled back their expenditures, as reported by Commbank.
In stark contrast, individuals over 60 are increasing their spending by 4 percent, with those aged over 70 upping theirs by more than 7 percent.
Chalmers’ reforms may come too late for the young people struggling right now, which is why the government is promoting initiatives that will take years to realize.
Empowering regulators regarding mergers and acquisitions might foster competition, but our economy may be too small to sustain beyond the current oligopolies. Meanwhile, the supermarket inquiry is unlikely to uncover any smoking gun related to pricing, and the promised new homes will not be ready until long after the next election.
Even the proposed ban on social media is a year away, meaning teenagers will not exit TikTok in time to fill part-time jobs traditionally held by temporary migrants.
End of an Era for Rates
The future does not look bright for young Australians, further darkened by new research from Westpac indicating the world is shifting into an era of interest rates significantly higher than pre-pandemic levels, alongside stagnant wages.
Westpac economist and former Reserve Bank assistant governor Luci Ellis, along with her colleague Pat Bustamante, suggests that escalating public spending on net-zero transitions, defense, and an aging population will absorb capital at a time when the private sector is heavily investing in the digital economy.
Hundreds of billions of dollars are being deployed to construct energy-intensive data centers, and the demand for artificial intelligence necessitates annual reinvestment in new chipbanks.
Westpac has begun to note these investments reflected in Australia’s capital expenditure data. However, something intriguing is also emerging. Increasingly, capital spending is directed towards so-called intangibles like software.
This has significance in two ways, according to Ellis.
Firstly, the evolving technology landscape is historically not advantageous for employees. During the first wave of software adoption, changes in required skills “diminished workers’ bargaining power and shifted some of the production income share from wages towards profits.”
Increased pace of technological change, as seen with AI investments, suggests a “faster rate of turnover in the types of available jobs.” This does not bode well for future wage growth.
Additionally, rapid obsolescence of technologies like data centers will require substantial capital for replacement within relatively short timeframes. Whereas manufacturing machinery once had a lifespan of 20 years, these modern technologies must be replaced every two and a half years.
As governments grapple with the protracted and significant costs associated with energy transitions, defense, and an aging populace, companies will be vying for capital to finance the current technological surge driven by AI.
This leads to Ellis’s perspective that interest rates will trend higher in the long term, as the pool of savings may not suffice to support all new investments.
“The period from the GFC to the pandemic, characterized by exceptionally low interest rates, has come to an end,” Ellis remarks. She anticipates central banks will recalibrate rates to around three percent and bond rates to exceed four percent. Following a decade of significantly lower rates, the world must “prepare for the reality that the global rate structure is elevated, and some projects that once appeared economically viable five or ten years ago may no longer be,” she concludes.
These changes will impact homeowners, share markets, and governments, which will need to adjust to a landscape where higher interest rates diminish long-term borrowing capacity, decrease company valuations, and compel more prudent fiscal strategies.
Perhaps it would be wise for Jim Chalmers to pass this challenge onto someone else.
