Spending figures shows economy running hot: the economic issues the new government faces

The strength of the domestic economy which the new government will inherit was confirmed in the March household spending figures released today by the ABS. Although slower than February, expenditure was still up 6.6 percent year on year, with the pace of growth higher than inflation. Spending on recreation and culture, clothing and transport led the way.

Households are facing significant headwinds, from elevated inflation and now rising mortgage interest rates, and momentum will ease further in the coming months. The lockdowns in China are creating supply constraints (lifting manufactured goods prices globally) as well as a negative demand shock for Australia’s commodity producers, tourism operators and universities.

Heightened uncertainty (along with supply chain disruptions) is likely to weigh on business investment. Thursday’s capital expenditure survey will shed some light on business investment sentiment.

In addition to the economic environment, the government also inherits a challenging budget position, notwithstanding the faster-than-expected shrinking of the budget deficit. So to ensure medium and long term sustainability of the public finances, the new government will have to tackle productivity reforms to lift the pace of growth, or potentially face a period of budget repair through tax increases and/or spending cuts.

During the election campaign the incoming Labor government committed to additional spending on health and well-being, with a particular focus on aged care, childcare provision and the PBS, a $15bn National Reconstruction Fund to support jobs creation.

A core element of the Labor policy platform was on social and affordable housing; the provision of around 6,000 new houses for lower-income and vulnerable people for each of the next five years. This rate of new construction for public housing is possible, albeit it is about twice the number of total new public sector dwellings that were completed across Australia during 2021. The bigger issue is the cost of building new houses, which has risen 13.7 percent over the past 12 months, and is expected to remain elevated in the short term.

Given that these spending priorities are set against an economy that is running hot, with no real need of further fiscal stimulus, the challenge for the government will be implementing these new policy initiatives without stoking the inflationary fire, which is already heating up.

Reducing the cost of childcare, and therefore reducing the barrier to work, is a welcome step towards enabling women to fully participate in the labour market; achieving this would materially increase the size of the economy. Female participation rates remain nearly 10 percentage points below men, with the gap beginning as women enter child-bearing age. Furthermore, the gains from increased participation are not confined to women; access to high quality childcare has been shown to improve health and education outcomes of the children themselves, generating a further economic dividend in the future.

But it must be noted that the barriers to female participation in the workforce (and gender pay equality) are complex. To lock in further gains, the government will need to support flexible working across all sectors, improve the quality of childcare (including before and after school care), consider superannuation reforms to enable women to close the gap with men, and explicitly consider other caring responsibilities, such as care for elderly or infirm relatives, in its gender-responsive budgeting.

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