Chalmers Faces a World of Hard Choices, Where Fixing One Economic Problem Worsens Another

A week after Jim Chalmers told an audience the economy would be "a bit better" in a year's time, the treasurer said on Friday morning that his officials were marking down their forecasts. The revisions, being prepared for December's mid-year budget update, will show slower growth and higher unemployment. It was a small reversal, but it summed up the week.

The pressure is coming from several directions at once. Overnight, a widening Middle East conflict pushed the global benchmark oil price to US$113, within reach of its April high of nearly US$120. Australian motorists are already paying 60 cents more per litre of petrol than before the US and Israel attacked Iran. That is an extra $36 to fill a 60-litre tank, and for a family filling up once a week, $144 more a month than in February.

The outlook may not be settled. The New York Times reported overnight that the US and Israel have drawn up plans to resume attacks on Iran after the American midterm elections. Westpac analysts have sketched an "escalation" scenario in which oil climbs toward US$150, echoing warnings the International Monetary Fund issued earlier this month. Such an outcome would have large consequences for inflation and interest rates, and the country is already bracing for a possible fifth rate rise on 3 November.

The one bright spot that has helped cover many of the cracks in the global economy, the enormous spending tied to artificial intelligence, is also wobbling. Investors are worried about the surge in debt among companies racing to build AI infrastructure, which set off another steep sell-off on Wall Street overnight. Community opposition to the datacentre build-out could slow the rush as well. The Guardian's analysis suggests that may be healthy in the longer run but adds stress now, and talk of a new tech bubble is arriving with talk of a bust.

Against that backdrop, Chalmers has little to offer Australians who want evidence that years of disruption are ending, and whose wages are not keeping pace with high and rising prices. The Reserve Bank's Andrew Hauser has called the combination of high inflation, low growth and rising unemployment a central banker's "nightmare". It is one for a treasurer too, who is increasingly unpopular and in need of a win with the public.

Chalmers told Politico the pressures on people are "very substantial" and keep him awake at night. He said some causes are outside his control and others he can influence, such as providing cost-of-living help and managing the budget responsibly. But he added that in many ways the government is hostage to decisions taken in Washington, Tehran or Eastern Europe about two wars that are pushing up inflation and weighing on growth worldwide.

He is right that much lies beyond his reach, though not everything does. High government spending is not helping the inflation fight, a point the opposition makes at every opportunity. Productivity growth is stalled, which means the economy hits its speed limit sooner, producing more inflation at lower rates of growth. His usual reply, that other economies have it worse, does little for voters.

The options are narrow and each has a cost. The government could cut the fuel excise again for a time to lower petrol prices, but the billions it puts into motorists' pockets would make the Reserve Bank's job harder. It could instead announce large spending cuts in December's update, which would help the central bank but drag on an already weak economy and push unemployment up. Hauser calls this a "world of hard choices", where fixing one problem worsens the other. The next marker is the Reserve Bank's 3 November decision, followed by the December update.