Hey Dutton: Good economic managers don't try to panic the punters

A problem in economics is that you can’t use the economy to do experiments. But as economists realised some years ago, sometimes the economy presents you with circumstances that constitute a “natural experiment”. This happened last week, and Peter Dutton flunked the test.

In the days immediately after Mad King Donald’s big tariffs announcement on “Ruination Day”, sharemarkets around the world were crashing, people were feeling panicky and no one was sure what it meant or where it would lead, except that it sounded very, very bad. As usual, the media wasn’t helping.

Treasurer Jim Chalmers and his boss, and Reserve Bank governor Michele Bullock, were doing their job, calmly trying to calm everyone down. Acknowledging the great uncertainty, but trying not to add to it.

Treasury had done some initial modelling, and though it looked bad, it didn’t look that bad. Bullock and her boffins had thought hard about it and decided we’d weather the cyclone without too much damage. Certainly, we were well-placed to withstand the buffeting. (Translation: the Reserve had plenty of scope to cut interest rates if necessary, and unemployment was unusually low.)

So, how did the leader of the party claiming to be the best at managing the economy react? He should have resisted all his instincts as a good economic manager to join the authorities and help put out the fire, and just kept his mouth shut.

How did Dutton react? He thought: “You little beauty, here’s my chance to put the frighteners on. I’ll go for it.” So he stoked fears that a recession was imminent.

Asked if Australia was heading into recession, he replied, “it is under Labor” and “the government hasn’t prepared our economy”.

Elsewhere, he said: “We know that Australian families have lived through almost two years of household recession. That’s what Labor has already delivered during the term of government.

“The treasurer is talking about a 50-point reduction in interest rates, which means obviously he sees a recession coming for our economy.”

With that performance, Dutton has disqualified himself from high office. He’s been a cabinet minister for decades, but still hasn’t learnt – or doesn’t care – that people at the top don’t use the R-word until the numbers actually on the board leave them no choice.

He doesn’t know that, whereas individual commentators like me can say what they like without anyone taking much notice, when people in high office speculate about the likelihood of recession, confidence is further damaged, which risks making their predictions self-fulfilling.

Despite his bachelor’s of economics, Anthony Albanese has taken little interest in the economy, but at least he knows what not to say. Dutton’s problem is his Superman complex. He sees himself as responsible for the saving us from the rising tide of crime and pestilence that besets us.

His powers allow him to see what we can’t: the roaming African gangs keeping Melburnians trapped in their homes; the women in supermarkets with machetes being held to their throats.

This is how he knows he can do a deal with Trump that Albanese can’t; he can save us from the recession that’s inevitable under Albanese. He doesn’t need to know the details of economics because he has kryptonite to do his heavy lifting.

Note that Dutton’s shadow treasurer, Angus Taylor, hasn’t joined him in his fearmongering. Taylor is a qualified economist of good repute. His trouble is that, not having served an apprenticeship in a minister’s office, he can’t play politics at a professional standard. He can’t tell lies with a straight face.

He wouldn’t have resorted to the muddled thinking Dutton used to justify bandying the R-word about. Dutton thinks Chalmers’ self-serving prediction of imminent hefty interest rate cuts is proof a recession is coming. It doesn’t occur to Superman that, if rates were cut sharply, the objective would be to forestall a recession. Is he implying that he could prevent recession without cutting rates?

It’s true that, thanks partly to high rates (but also an earlier fall in real wages, and massive bracket creep), consumer spending has been weak, so that only strong growth in the population has kept gross domestic product struggling on. Many have said this means we’ve suffered a “per-person recession” for the past two years.

But let’s get real. And let’s not be misled by the money market and media-promoted nonsense that two successive quarterly falls in real GDP constitute a “technical” recession. Why is it that sensible people live in fear of recessions and responsible political leaders never use the R-word until they have to?

Well, it’s not because GDP has fallen backwards for a couple of quarters. What can take a bit longer to appear is the consequence of a significant fall in economic activity: falling employment and rising unemployment. It’s the sight of thousands of people losing their jobs, the fear you may be next, and the knowledge that it would take weeks or months to find a new job, that scares the pants off normal people.

So, if we’ve been in “per-person recession” for two years, what’s happened to the jobs market in that time? Total employment has risen by more than 750,000, the proportion of working-age people with jobs is almost the highest it’s ever been, and the rate of unemployment has crept up just 0.5 percentage points to a still-amazingly-low 4 per cent.

Does that sound like a recession to you? It’s the complete antithesis of a recession, which is why the Reserve has been so reluctant to cut interest rates.

In this campaign, there’s been far too much whingeing about the cost of living with almost no acknowledgement of one fact that should have all of us thanking our lucky stars: our jobs market has never been better. Almost everyone who wants a job can find one – or more than one.

In all Dutton’s efforts to convince us life is insufferable, and it’s solely Albanese’s fault, there’s been zero mention of our tip-top jobs market. In all our self-pity, we’ve allowed a man with no interest in the economy, and little knowledge of economics, to mislead us.

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Supermarkets: Be polite, say "excessive pricing" not "price gouging"

 By MILLIE MUROI, Economics Writer

They’re the villains that return in every episode of the cost-of-living fight. And despite the competition watchdog swallowing any mention of “price gouging” in its recent inquiry, supermarkets are still copping heat.

They’re an easy target because there’s little competition for places where people have been noticing price spikes more than in the aisles – and checkouts – of their local Coles or Woolworths.

We also know consumers tend to overestimate price pressures. Why? Because eye-popping price rises are more memorable than the deals and discounts we land. Humans are programmed that way because it’s more important for our survival to spot bad things – like a tiger in the trees – than good things, like a warm patch of sunshine.

But eagle-eyed customers were a key reason supermarkets got bitten by the watchdog for their illusory discounts last year, and both Labor and the Coalition know that cost of living is the single biggest issue they have to win voters over on for a chance to form government.

That’s why Opposition Leader Peter Dutton has pushed for powers that would give him the ability to break up the major supermarkets, and Labor has been cracking down with a mandatory food and grocery code and a promise to outlaw price gouging.

But there’s been a key bullet point missing on the shopping list: a clear idea of what “excessive prices” actually mean. One shopper’s idea of price gouging could be vastly different to that of their neighbour – and almost certainly different to that of the bosses of Coles and Woolworths.

Now, the competition watchdog this year released a damning report revealing Australian supermarkets nudged up their profit margins during the cost-of-living crunch and are among the most profitable supermarkets in the world.

But they stopped short of calling Coles and Woolworths out for “price gouging”: a subjective and pejorative term for when businesses increase their prices much more than is considered “reasonable” and “fair” – which are also subjective.

And in their list of 20 recommendations, not once did the Australian Competition and Consumer Commission mention the need to ban the practice.

So, if the ACCC didn’t suggest it, where did the idea come from? And why is a ban on excessive mark-ups on the cards?

Well, it’s another case of Labor proposing a small but worthwhile reform. These ideas have to be ticked off by big-wigs, but the heavy lifting is done behind the scenes.

Pull back the curtains of government, and you’ll find a section of Treasury beavering away under the leadership of assistant minister and former economics professor Dr Andrew Leigh.

The Competition Taskforce, established by the government in 2023, is a response to the increasing concentration of the Australian economy over the past 20 years. It’s made up of a couple of dozen people and Leigh says it’s not just a handful of men with grey beards tapping out once-off reports, which has traditionally been the way economic reform has been put on the table.

Instead, he labels it a “crack team” of about a dozen people, churning out policy advice on an ongoing basis and tick-tacking with stakeholders – in a way that experts tasked to do a single report may not.

While the ACCC has taken the reins on scrutinising supermarkets recently, most memorably through its scathing report, Leigh says the government’s policies have been informed by the taskforce’s previous work in the space, such as the mandatory food and grocery code – aimed at protecting suppliers and farmers – which came into play at the beginning of this month.

And while the ACCC might have shied away from slapping the “price gouger” label on the supermarkets, Leigh says the weight of the evidence suggests there’s a clear problem.

“We’ve seen their margins increase over COVID,” he says. “We’ve got them in court with the ACCC. The supermarkets have not exactly covered themselves in glory over the last couple of years.”

And compared with the last time the competition watchdog probed the supermarket sector in 2008, Leigh says the 2025 inquiry is awash in data. “[The ACCC] has analysed more than a billion prices so they’ve got data on more than a million prices from the two supermarkets, every week, over a five-year period,” he says: something that was unheard of two decades ago.

The availability of information and the ability to crunch and analyse huge amounts of data has given the government confidence to make the call – or at least to take action on an issue they know voters are still eyeing very closely and passionately.

It’s far from an immediate fix. The government’s promise to ban price gouging by supermarkets will first require them to form a new taskforce to give advice on what “excessive pricing” might actually look like.

And chasing the two giants around with a stick doesn’t necessarily remove some of the key barriers to stronger competition in the supermarket sector, such as inconsistent zoning laws which lock out competitors in many areas around the country. While the government has, in principle, agreed with all the recommendations from the ACCC, we’re yet to see follow-through on most of them.

That doesn’t mean that setting out to define “excessive pricing” is a bad thing. It’s one of those concepts that seems obvious but which people still disagree over. And without a yardstick, the supermarket giants – and every other business – know there’s a grey area they can play in and take advantage of.

The government’s latest action on supermarkets is good because it puts Coles and Woolworths on notice. If they are misbehaving or pushing their luck with questionable pricing, the bosses should be gathering at their drawing boards, rethinking their approach and preaching some caution.

If they’re not doing anything wrong, they have nothing to worry about.

Either way, it also puts every other sector on notice – especially given the taskforce’s current work on identifying concentration hotspots: areas of the economy where big firms dominate and competition is especially weak.

And by clearly setting out what “excessive pricing” means, we can more easily deter firms from crossing the line, identify when and where it’s happening and crack down on the practice – and ultimately the prices we pay.

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Energy's a big part of living costs, but fixing it won't be cheap

The voters’ insistence that the election campaign must be about the cost of living has been a godsend to both major parties. They can look as if they’re lowering electricity and gas prices and avoid talking about their failure to tackle climate change.

Unfortunately, however, climate change and energy prices are closely connected – which does much to explain why their promises to cut power prices never mean much.

Voters seem permanently obsessed with energy prices, and they’ve figured in most election campaigns for decades. But it’s mainly been smoke and mirrors.

Julia Gillard introduced a tax on carbon in 2012 and, had it survived, we’d now be well advanced in reducing our emissions of greenhouse gases. Instead, Tony Abbott got himself elected partly by his exaggerated claims about what it would do to electricity prices, then promptly abolished it.

Today, Labor is still a supporter of climate action, with a legislated commitment to reduce emissions by 43 per cent by 2030. But it doesn’t want to talk about it because it’s proceeding slowly, and working both sides of the street by agreeing to new coal mines and gas platforms.

I doubt if Peter Dutton’s Coalition wants to talk about climate change either. They claim to believe in climate action, but their new plan to switch from renewables to using taxpayers’ money to build multiple nuclear power stations is really an excuse for doing nothing until those power stations may be built in a decade or two’s time.

The switch to distant nuclear resolves the Liberals’ disagreement with the Nationals who, being close to the mining lobby, have no enthusiasm for the Libs’ commitment to net zero emissions by 2050.

So, let’s not mention any of that. “You say the high price of energy has worsened your cost of living? Well, have we got a deal for you.”

Everywhere you look in this campaign you see one side or the other promising something to do with energy. Labor promises to extend its $75 a quarter discount on electricity bills for another six months until the end of this year.

The Coalition’s promising to cut the excise on petrol and diesel immediately by 25c a litre for a year. And it’s promising to reduce the wholesale price of gas by forcing gas producers to make more of it available to local users rather than exporting so much of it at high prices. (Gas is the most expensive fuel used to produce electricity, so reducing its local price would make power a bit cheaper.)

This has made the gas producers very unhappy. And Peter Dutton hasn’t provided much detail about how his gas plan would work.

Even so, Dutton has brought to light some truths that successive federal governments haven’t wanted us to know.

We’re always being told there’s a great shortage of gas because the three big gas liquefaction plants in Gladstone have lucrative contracts to export it all. But as Dutton has correctly said, there’s still a lot of it that’s uncontracted and so could be diverted for local use.

One way to discourage those companies from exporting so much of our gas would be to impose a tax on those exports, as Dutton has suggested. This has these largely foreign-owned companies reaching for their lawyers.

We always assume that our exports bring us great benefits. Mostly, but not always. We are one of the world’s biggest exporters of liquified natural gas, but research by the Australia Institute has found that no royalties are paid on 56 per cent of the gas we export.

Why? Because of loopholes in our petroleum resource rent tax.

Getting back to our complaints about the cost of energy, Labor’s always telling us that “renewable energy is incredibly cheap because its fuel [sun and wind] is free”.

That’s true, but misleading. At present, our grid of high-voltage power lines run from the coalfields to big cities such as Melbourne and Sydney. Switching from coal to renewables involves building a whole new network of powerlines running from solar and wind farms.

Building all those poles and wires is hugely expensive, and the cost will be passed on to you and me in the electricity prices we pay. Only when the new network’s been paid off will retail prices be a lot lower.

But this is where Labor has played a smart card in this election with its promise to subsidise the cost of adding a battery to your new or existing rooftop solar panels (and maybe the Coalition will announce something similar).

Some people have rooftop solar because they want to play their own part in reducing greenhouse gas emissions. Some people see it as an investment in reducing their electricity bills. And some people have panels because all the neighbours have them.

Whatever the reason, about a third of all Australian homes have rooftop solar which, on a per-person basis, makes us the world’s biggest rooftop solar country. Many people were encouraged to install solar by federal and state government subsidy schemes.

Obviously, the panels produce more power than you need during the day, and none at night when you have many gadgets running, especially in winter. So most people put power into the grid during the day and take it out night.

But the energy experts don’t really see rooftop as a key part of the complex distribution system they’re running, and sometimes rooftop can disrupt it.

So, although Anthony Albanese’s offer to cover up to 30 per cent – or $4000 – of the cost of buying and installing a home battery strikes me as likely to be pretty attractive as electoral bribes go, it will help reduce pressure on the grid.

True, it’s of no benefit to renters, or home owners who can’t afford the cost of panels or a battery. But it’s wrong to imagine it’s only the wealthy who’d benefit. If you’re really rich, you don’t worry how big your power bill is.

And don’t forget this: the more voters who see themselves as the good guys doing their bit to stop climate change, the more likely our politicians are to lift their game.

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Trump's trade war is bad, but how bad is up to the rest of us

At last, we know enough about President Donald Trump’s opening move on tariffs to start thinking about what it all means. By imposing tariffs on America’s imports, he’s shot his economy in the foot, but the rest of the world decides how bad it’s likely to be by what we do in response.

But first, don’t be too impressed by the big fall in share prices. The sharemarket isn’t the economy. You could regard its movements as a predictor of whether the economy will keep growing strongly or fall in a heap, but it’s an unreliable guide, having called a lot more recessions than have actually happened.

Compulsory superannuation has given every employee a stake in the sharemarket – including overseas sharemarkets – but although share prices go down as well as up, over the years they tend to rise. So only if you’re just a year or two away from retirement – and will be needing to sell shares for money to live on – should you care about the latest drop.

Back on tariffs, everyone benefits from being able to trade with other people, whether they live inside or outside our country. The lower the barriers to trade, the better off we and our trading partners become.

So, while Trump’s tariffs – import duties – will hurt the countries it imports from to an extent, it’s the American businesses and consumers now having to pay more for their foreign purchases that will be hit hardest.

What he’s done will increase US prices and discourage growth in his economy – an unusual combination – increasing the risk of a US recession.

But, as most people realise, the direct effect on Australia from Trump’s act of self-harm won’t be great. That’s because the Yanks take a surprisingly small share of our exports, and the new tariff on us is just 10 per cent. Thankfully, neither Anthony Albanese nor Peter Dutton is foolish enough to add to the harm by slapping tariffs on the modest amount of stuff we import from the US.

So, what matters most to us is the indirect effects on us from Trump’s attempts to start a trade war with the other big economies. If they decide to damage themselves by hitting the US back tit-for-tat, then it really would be a global economic disaster.

Fortunately, the early signs are that most countries have been too smart to yield to that temptation. They’ve said that while they’re ready to take “countermeasures”, they’ll start by opening negotiations to secure a deal.

Trump is so crazy there’s always a chance that’s all he’s after. “You give me something, and I’ll put the big stick away.” If so, the trade war doesn’t really get going. But it’s risky to give in to bullies, which only makes them want to come back for another bite.

If Trump demands too much in return for dropping his new tariff, America’s former friends and allies will be obliged to press on with the countermeasures they’ve prepared. Since a tit-for-tat approach would be self-harming, we can hope that these will have been carefully designed to hit the US harder than they damage their own economies. That would minimise the fallout from the trade war.

On the face of it, however, the main country Trump is trying to punish, China, has not resisted the temptation to give as good as it’s got. Trump’s new tariff on China is 34 per cent which, added to its existing duties, gives it a total impost of 65 per cent. China will hit all its imports from the US with a 34 per cent tariff.

“Face” could well be part of the problem here. China, now the world’s biggest economy (when you allow for “purchasing-power parity” because $US1 buys a lot more in China than it does in the US), can’t fail to hit back when whacked by the second-biggest economy.

The trick is that America buys a lot from China, and China buys a lot from America. It’s when the two big boys really start slugging it out that the risk of recession in the US becomes a risk of a global recession. And, since China is our biggest export market, that’s where the most indirect damage could hit us.

There’s always a possibility that when enough Americans realise that, contrary to what it says on his baseball cap, Trump is Making America Poor Again, he’ll be forced to wind the whole madness back down.

If we do really have a trade war that lasts longer than a year or so, then there are two things to remember. First, if the other big economies, such as the European Union, Japan and Britain, don’t join in the madness, then most of the damage is confined to the US and China as they slug it out. We’d still be hit by a significant indirect loss of export income, but it could have been worse.

Second, the longer the two biggest economies continued their boxing match, the more the rest of the world would start diverting our trade away from the US. And since the US is attacking all the other countries – including very high tariffs on some South-East Asian economies – but China is attacking only the US, much of the diversion is likely to head in China’s general direction.

Remember, the US was the primary driver for a Trans-Pacific Partnership, aiming to set trade rules in the Pacific Rim and counter China’s growing economic influence. When, in his first incarnation, Trump pulled out of the proposal, the rest of us – including Japan, Canada, Australia, Chile, Peru, Mexico and several South-East Asian nations – pressed on, simply renaming it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

And note, just before Trump’s “Ruination Day” announcement, the leaders of China, Japan and South Korea met and agreed to strengthen trade ties in response to whatever Trump announced.

If Trump’s tariff madness isn’t likely to kill off the world economy, it will certainly cause major changes to who’s trading with whom. And we’ll be doing a lot more trade with the countries in our region.

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The fine print costing Australians a pay rise

By MILLIE MUROI, Economics Writer

Hidden in the job contracts of about one in five Australians are little clauses weighing down their chances of landing a pay rise or a better-fitting role.

They might, for instance, ban you from working for any of your employer’s competitors for a set amount of time – even after leaving your job. Or, they can prevent you from setting up your own business in the same industry. These are called “non-compete” clauses, and they’ve been on the rise for the past five years.

From 2027, non-compete clauses on workers earning less than $175,000 a year could be banned by a Labor government. But why are these clauses so bad? And will banning them make much of a difference for workers or the economy?

Non-competes are mostly in place to protect business interests, but in some roles, they can be reasonable. For example, they might stop a big bank employee from sharing timely and confidential information or business secrets with a competitor or prevent them from taking client relationships they’ve developed through the bank to another bank.

But in some cases, these clauses simply handcuff low-paid workers to their jobs, stopping them from seeking better jobs. Roughly 3 million Australians are affected by these clauses, including childcare workers, construction workers and hairdressers. Who knew childcare was so full of sensitive trade secrets?

Non-competes are generally not enforceable – unless a court rules that it’s “reasonably required” to protect a “legitimate interest”. But as former Fair Work Commission president Iain Ross points out, these “interests” have expanded to concepts such as a “stable workforce”.

The open-endedness also tends to benefit employers because they usually have more resources to back them up, and workers aren’t often willing to foot the legal costs and spend time arguing their case in court. A 2013 study, for example, put the cost of legally challenging the validity of a non-compete at between $20,000 and $100,000 – a year’s worth of salary or more for some employees.

Another 2020 study in the US found that non-competes tended to discourage workers from leaving for a competitor by roughly the same degree regardless of whether it was enforceable or not.

That means workers tend to just suck it up and stay in their jobs – even if it means missing out on a pay rise. And it’s often the lower-skilled and lower-paid workers with weaker bargaining power who are hit hardest.

Economic research institute e61 found people who work for companies that use these clauses are paid 4 per cent less on average than similar workers at similar firms that don’t use them. Lower-skilled workers bound by non-competes were even harder hit, earning about 10 per cent less after five years than those who weren’t bound by these clauses.

For a worker on a median wage, banning non-compete clauses could lead to a wage increase of up to $2500 a year.

But non-competes aren’t just an issue for workers. They are also a drag on the economy.

Lower job mobility – that is, less ability for workers to switch jobs – can be a downer for productivity. Why? Because they’re less able to move to jobs they might be a better fit for, and because it dampens the incentive for businesses to better themselves in order to attract and retain their workers.

Ross also points out that some of the key barriers to Australia improving its productivity include weak business investment and a slowdown in business dynamism: meaning fewer new firms, less movement of workers between firms and weak adoption of new technologies.

Banning non-competes will boost productivity because it allows workers to move to jobs they may be better at. It also forces businesses to innovate and find ways to improve the way they do things – including investing in training and support they provide to their workers – in order to stay ahead of their competition and stay in business.

Research from the Productivity Commission suggests the proposed ban on non-compete clauses could fast-track productivity and add $5 billion – or 0.2 per cent – to Australia’s GDP.

Neither major party has been game to tackle the big issues such as tax reform (which are crucial to improving our productivity and living standards), but banning non-compete clauses for those earning less than $175,000 a year is a start.

Of course, the details of this change are yet to be ironed out. And business groups have been quick to leap out against it.

The Victorian Chamber of Commerce, for example, called it “workplace overreach” while the Council of Small Business of Australia said it made life harder for small businesses already struggling with skills shortages.

There’s valid criticism that banning non-compete clauses puts some confidential information at risk. But this could be covered by non-disclosure agreements, which are less of a drag on job mobility and wages – and, in any case, the positive impacts for the economy will outweigh the negatives.

Critics also claim non-compete clauses encourage businesses to invest in areas such training and upskilling their workforces because they can be less worried about losing their workers and wasting resources if those employees decide to leave the job.

But stronger competition could also drive businesses to offer better training opportunities and foster more productive work environments to maintain their edge over competitors.

The Coalition is on the fence about the proposed change, saying it believes employees shouldn’t be “unreasonably restrained” from changing employers or starting their own business, but that small businesses shouldn’t face having their sensitive commercial or customer information “taken by an employee and given to one of their competitors”.

It’s worth noting large businesses are twice as likely to use non-compete clauses as small businesses and that non-competes tend to favour large, existing businesses over small and new firms.

There are certainly limitations in the government’s proposed policy, and details yet to be ironed out. For instance, would the change apply only to new contracts drawn up from 2027 onwards, meaning it would have no effect for the millions of Australians currently bound by them? These questions won’t be answered until the government completes its consultation process.

There’s also evidence that a full ban on non-competes – not just for those earning under a certain threshold – can have widespread benefits. Evidence from California – home to the Silicon Valley – for instance, suggests a complete ban could foster a more dynamic labour market where workers can move around more freely and share knowledge.

It’s taken a long time for the government to care enough to pursue this change – most likely because of the backlash it knew would come from business owners. But if we want agile and innovative businesses, productive workers and a stronger economy, a ban on non-competes is a no-brainer.

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Are you better off now? That's Dutton's trick question

For most people, the simple answer to Peter Dutton’s repeated question – are you better off today than you were three years ago? – is “no, I’m not”. But if Dutton can convince us this is the key question we need to answer in this election, he’ll have conned us into giving him an easy run into government.

Why? Because it’s the wrong question. It’s the question of a high-pressure salesman. A question that makes the problem seem a lot simpler than it is. A question for people who don’t like using their brain.

And it’s a question that points us away from the right question, which is: which of the two sides seems more likely to advance the nation’s interests in the coming three years?

Economists have a concept called “sunk costs” – money (or time) that you’ve spent, and you can’t unspend. Economics teaches an obvious lesson: you can’t change the past, so forget it and focus on what you can change, the future.

But, since it’s become such a central issue in this election, let’s dissect Dutton’s magic question. For a start, it’s completely self-centred. Focus on what’s happened to you and your family and forget about what’s happened to anyone else.

Similarly, the implication is to focus on the monetary side of life. Forget about what’s happened to the natural environment, what we’ve done to limit climate change, and what we’ve done about intergenerational equity – the way we rigged the system to favour the elderly at the expense of the young.

Next, Dutton’s question is quite subjective. He’s not asking us to do some calculations about our household budget or to look up some statistics, just to say whether we feel better or worse off.

Guess what? This subjectivity makes us more likely to answer no. As we’ve learnt from the psychologists, humans have evolved to remember bad events more strongly than good events.

This is why most people believe that inflation is much higher than the consumer price index tells us. As they do their weekly grocery shopping, they remember the price rises much more clearly than any price falls. And in the personal CPI they carry in their heads, they take no account of the many prices that didn’t change – which they should, and the real CPI does.

Humans find the bad more interesting and memorable than the good because the bad is more threatening, and we have evolved to search our environment for threats.

In this case, however, objective measurement confirms that most people are right in thinking their household budgets are harder to balance than they were three years ago. There are various ways to measure living standards, but probably the best single measure is something called “real net national household disposable income per person”.

Between June 2022 and March 2024 (the latest quarter available), it fell by 3.6 per cent. It may have recovered a bit in the 12 months since then, but not by enough to stop it having fallen overall.

But that’s just an economy-wide average. We can break it down into more specific household categories. Those dependent on income from wages are worse off because consumer prices rose a little faster than wages – though wage rises fell well short of price rises in the couple of years before Labor came to power. This is a shortfall wage-earning households would still be feeling in their efforts to balance their budgets.

The rise in interest rates since the last election means the households feeling by far the most pain over the past three years are those with mortgages.

This also means those who own their homes outright have felt the least pain. Most people on the age pension have done OK because most of them own their homes and the age pension is fully indexed to the rise in consumer prices.

As for the so-called self-funded retirees, they’ve been laughing. Not only do they own their homes, their super and other investments earn more when interest rates are high.

True, it’s common for elections to be used to sack governments who’ve presided over tough economic times. Be in power during a recession and you’re dead meat. So elections are often used to punish governments, on the rationale that the other lot couldn’t possibly be worse.

But the side that benefits from such circumstances, taking over when everything’s a mess, won’t have it easy getting everyone back to work and having no trouble with the mortgage in just three years.

I can remember when the Morrison government was tossed out in 2022, smarties among the Liberals telling themselves this probably wasn’t a bad election to lose. Why? Because they could see consumer prices had taken off and had further to go. Using higher interest rates to get the inflation rate back down would be painful and protracted, possibly inducing a recession.

This is why Dutton’s question is so seductive to people who don’t follow politics and the economy, and don’t want to use their grey matter. “If I felt the pain on your watch, it’s obvious you’re to blame and you get the sack. Don’t bother me with the details.”

Remember, however, that all the rich economies suffered the same inflation surge we did, all of them responded with higher interest rates, and most suffered rising unemployment and even, like the Kiwis, a recession. But not us.

So let me ask you a different question: over the past three years have you ever had cause to worry about losing your job? Have you spent a lot of time unemployed while you find one? Have more people in your house been able to find work?

Our employment rate is higher than it’s ever been. Our rate of unemployment is still almost the lowest it’s been in 50 years. This has happened because the Albanese government and the Reserve Bank agreed to get inflation down without a recession.

But the price of avoiding recession is interest rates staying higher for longer. If you think Labor jumped the wrong way, kick the bastards out.

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Budget deficit perfection would be nice, but among the best is fine

The independent economist and former Treasury officer Chris Richardson, the leader of Treasury-in-Exile and thus chief apostle of fiscal rectitude, does the country a favour with his eternal campaigning to keep budget deficits and public debt levels low.

It works like Defence, where the retired generals do the talking for the serving generals, whose opinions must be expressed only to their political masters in private.

But all those people who, only in recent times, have joined the protest march demanding an end to deficit and debt don’t want to do the country any favours. I’m no great admirer of the Albanese government, but that doesn’t make every criticism of its performance reasonable.

According to these partisans’ version of events, the budget was in surplus and doing fine until this terrible government started spending with abandon, plunging the budget into deficit, where it’s likely to stay for the next decade, leading to ever-rising public debt. So should some great global mishap come along, we’d be in deep doo-doo.

The first thing wrong with this narrative is its implication that the prospect of a decade of deficits is all Labor’s doing. There’s nothing new about budget deficits; the budget’s been in deficit for more than two in every three years in the past half-century.

What’s more, Treasury was projecting a decade of deficits in then-treasurer Josh Frydenberg’s budget before the last federal election in 2022. So why don’t I remember the people who profess to be so worried now, expressing much concern then? Surely not because debt and deficits only matter when you’ve got a Labor government?

Actually, and as Treasurer Jim Chalmers never tires of reminding us, the projected decade of deficits and rising debt we’re told about today isn’t nearly as bad as the one we were shown back then – the one that didn’t seem to worry anyone.

Why was the projection three years ago so much worse than this one? Because Treasury’s forecasts and projections soon became woefully wrong. The budget deficit of $78 billion it was expecting in 2022-23 turned out to be a surplus of $22 billion. For the following year, the expected deficit of $57 billion was a surplus of $16 billion.

That’s an improvement of more than $170 billion right there. And because this hugely better outcome came so early in the decade, it also meant a huge reduction in the feds’ projected annual interest bill.

But while Chalmers is wrong to claim so much credit for this astonishing turnaround, his critics are wrong to give him none. They dismiss this vast improvement in the debt outlook as nothing more than good luck.

Huh? Rather than falling, as Treasury always assumes they will, iron ore and coal prices took off, so mining company profits and company tax payments boomed.

That’s only half the story, however. Treasury failed to foresee that the economy would return to near full employment – and pretty much stay there to this day, despite the big increase in interest rates intended to get the inflation rate down.

This meant a record proportion of the working-age population in jobs, earning wages and paying income tax. As well, the inflation surge meant a lot more bracket creep than expected.

So, remembering the Albanese government and Reserve Bank’s joint policy of seeking to get inflation down without inducing a recession, you have to say there’s been an element of good management as well as good luck, for which Chalmers and Albanese deserve some credit.

Chalmers gets credit for saving rather than spending most of the government’s higher-than-expected tax collections – something that wouldn’t have happened if Labor had been spending as uncontrollably as the partisan critics claim.

Much effort has been put into demonstrating that government spending is “out of control” and will continue that way for a decade unless something’s done. But analysis by Dr Peter Davidson of the Australian Council of Social Service gives the lie to such claims.

Davidson measures budget spending by the average annual increase after adjusting for inflation and population growth – real spending per person. Over the 27 years to 2018, the long-term average increase was 1.7 per cent a year.

But under the Abbott and Turnbull governments from 2014 to 2018, there was a period of budget austerity when the spending increase averaged just 0.1 per cent a year, as backlogs were allowed to build up and deficiencies were ignored.

Then, during the Covid response period from 2018 to 2022, spending grew by an exceptional 2.6 per cent a year. Now, over the six years to 2028, spending growth is expected to average 1.3 per year.

So claims of Labor’s profligate spending are themselves on the profligate side. It’s here that the critics move from partisanship to self-interested ideology. Their obsession with government spending comes from their ideology that, while all tax cuts are good, all spending increases are bad.

Why are they bad? Because they increase the pressure for higher taxes and reduce the scope for tax cuts. A decade of deficits caused by excessive tax cuts would be OK, but one caused by trying to ensure the punters got decent education, healthcare and social security is utterly irresponsible.

The final respect in which decade-of-deficits bewailers are wrong is their claim that our government’s financial position has us sailing close to the wind. Rubbish.

As former top econocrat Dr Mike Keating advises, if you take the debt of all levels of government in 2024, our gross public debt is equivalent to just 58 per cent of our gross domestic product. This compares with the Euro area on 90 per cent, Britain on 103 per cent, Canada on 105 per cent and the US on 122 per cent.

Much of the credit for our relatively low level of debt and deficit should go to decades of preaching by Treasury and its alumni, including Chris Richardson. But though they sometimes imply we’re at risk of being dangerously overloaded with debt, what they’re really trying to do is maintain our longstanding record as only moderate drinkers.

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Budget to give the economy a push next financial year

By MILLIE MUROI, Economics Writer

If there’s only one thing you gleaned from the budget – and it is the new tax cuts – that’s exactly what the government wanted.

The clock is ticking for Prime Minister Anthony Albanese, who, at the time of writing, was expected to call an election as early as Friday. That means a sweetener – such as a promise to let you keep more of your pay – is perfectly timed to nudge voters its way.

But the move also doubled as a distraction from something Labor would rather not talk about: the fact the nation’s finances will be in the red for the next decade despite a turnaround in the economy’s health.

This isn’t the end of the world, but with most of its major policies already announced in preparation for the election, the government knew it needed to give the press something good to latch onto when it unveiled its budget on Tuesday.

The tiny tax cut – the equivalent of about $5 a week for most taxpayers – due to kick in next year, was a sure-fire way to make a good impression.

But the budget revealed a bit more than just a cute tax cut. It also painted a picture of the state of the economy and the government’s game plan.

“Fiscal policy” is the government’s way of steering the economy by changing how much it spends and collects in tax. When the government increases its tax collections by more than it increases its spending from year to year, it’s choosing a “contractionary” stance (one that slows down the economy by taking more money out of it than the government pumps in).

When the government increases its spending by more than it increases its tax collection, it is adopting an “expansionary” stance (stimulating the economy by pumping more money into it). That’s the position taken by the government this year.

Turning to a page in the budget papers many economists call the “table of truth” shows us how the budget position for this financial year (and expectations for future years) has changed from previous forecasts – and what the biggest drivers are.

The “parameter variations” in this table tell us how cyclical factors – things the government has little control over – affect the budget. For example, lower global interest rates over the next few years are expected to shrink the interest rate bill paid by the government despite its growing debt.

AMP chief economist Shane Oliver says higher commodity prices and employment were the kind of parameter variations that helped deliver the government two back-to-back surpluses in 2022-23 and 2023-24.

Then there’s the effect of government policy decisions that weighed down the budget this financial year (2024-25) by $137 million more than was expected back in December, mostly because of an increase in spending on things such as cheaper medicines. This affects what’s called the “structural” part of the budget.

Next financial year, 2025-26, the government’s decisions will drain roughly $7 billion more than previously expected. That’s because it has made new promises such as earmarking $8 billion to boost the amount of bulk-billing and a six-month extension of electricity bill relief at a cost of $1.8 billion.

But improved economic conditions next year should help top up the budget by $12 billion. That’s mostly because of what’s called “automatic stabilisers”, which affect how much money comes into – and leaves – the government’s coffers, adjusting automatically to changes in the speed of the economy.

When business is booming and incomes are rising, for example, people pay more in tax, meaning more cash gets swept into the government’s hands. When the economy gets sluggish and people lose their jobs, the amount of tax flowing in falls.

As Betashares chief economist David Bassanese notes, the government is assuming (among other things) that there will be more people in jobs over the next few years, meaning there should be more income tax flowing in.

The government is also expecting economic growth to pick up and inflation to stay around the 2 per cent to 3 per cent target range, while slightly tweaking down its unemployment forecast to 4.25 per cent over the next four years.

Most of the savings, though, will be spent by the government, leaving the budget only a few billion dollars better off than expected back in December over the next four years – and still in deficit.

At the time of the mid-year budget update, the coming financial year was expected to have a $47 billion deficit – which is 1.6 per cent of GDP. Now, because of measures in the budget and changes in the government’s forecasts, it’s going to be $42 billion, or 1.5 per cent of GDP. The deficit is still a lot bigger than it was last financial year.

Now, it’s worth noting the Coalition, in 2022, also had deficits (that is, spending exceeding revenue) laid out for 10 years. As independent economist Saul Eslake points out, neither side of politics really wants to have the tough conversation of how to fix this problem when there’s growing demands for spending in areas such as healthcare and defence – and especially not before an election.

But the government isn’t the only major player when it comes to managing the economy. The Reserve Bank is also a heavyweight. It doesn’t have the same spending or tax powers, but it uses a tool called “monetary policy” – which you might know better as interest rates.

Like the government’s fiscal policy, monetary policy can be expansionary when interest rates are dropped (because it encourages spending and investment), or contractionary when interest rates are increased.

For the past few years, the bank has been cranking up interest rates in an effort to rein in inflation. For the first time since mid-2022, the bank in February notched down interest rates from 4.35 per cent to 4.1 per cent, moving towards an expansionary stance. Why?

Because it reckons, like the government, that prices are now rising slowly enough, and demand has softened enough relative to supply, to indicate the economy is no longer running too far ahead of its capacity.

The budget is unlikely to have much sway on the Reserve Bank’s forecasts or coming rate decisions. The spending changes were modest, the deficits have been flagged for months and the government’s forecasts aren’t drastically different to what the bank is expecting.

But if the outlook for the economy over the next few years is as rosy as the government is expecting, there’s a case for whoever is in charge in future years to ramp up efforts to return the budget to a surplus, or at least a neutral position, earlier.

That doesn’t have to mean drastic cuts to spending. It could mean changing the way the government collects revenue by introducing an inheritance tax or reducing the capital gains tax discount, and pursuing bolder productivity-boosting measures (Labor’s ban on non-compete agreements is a good start).

In the meantime, the budget for this financial year is expected to be nearly $28 billion in deficit. In the coming year, that deficit is expected to increase to $42 billion. This is an increase equivalent to 0.5 per cent of GDP, making the stance of fiscal policy adopted in the budget mildly expansionary.

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The government is timid and uninspired. This budget is a perfect fit

If you’re having trouble working up much interest in the budget, don’t feel bad. It’s not you, it’s the government. So much fuss is made about the annual federal budget that we expect it to be full of major announcements. Well, not this one, and not from a government that never wants to rock the boat.

It is, however, a budget we’ve wished on ourselves. We’ve made it clear that, while ever we’re feeling pain from the cost of living, we’re not much interested in anything else, and an unambitious government has been relieved to take us at our word.

Most of the measures in the budget are small cuts to various charges that affect households’ budgets. The government will be spending more to encourage GPs to bulk-bill their patients and to cut the maximum cost of a pharmaceutical prescription to $25 a pop.

It will extend the electricity bill rebate for the last half of this year, yielding households a saving of $150.

And not forgetting the big one that will make all the difference to the cost of living: indexation of the excise on draught beer will be paused for two years. Anyone who can see the saving per glass gets a prize for exceptional eyesight.

All this is to be done just as soon as we vote to re-elect the Albanese government – except that Peter Dutton has promised a Coalition government would do the same.

Of course, all these measures to ease the cost of living have already been announced, with one exception: a two-stage cut in income tax. Who knew? Surely, that’s something to get excited about?

Well, yes, until you examine the details. When Treasurer Jim Chalmers says the tax cuts are modest, he’s not exaggerating.

It boils down to this: in 15 months’ time, July next year, everyone earning more than $45,000 a year ($860 a week) will get a tax cut of a bit over $5 a week. A year later, they’ll get a further cut of $5, taking it up to $10.30 a week. Part-timers earning between $350 and $860 a week will get an initial saving of up to $5 a week.

Even with this last-minute addition, it’s not hard to believe that, until Cyclone Alfred intervened, Labor was hoping to hold the election in April and leave the budget until later. Why did the delayed election date prompt it to go ahead with a budget when it had nothing much to announce? Law and practice. It had to.

Still, budgets also tell us the government’s latest forecasts for the economy and for the budget bottom line: is the government expecting to spend more than it raises in taxes, or less? More. Every financial year for the next 10.

So the government foresees a decade of budget deficits and further borrowing to cover those deficits. Does it have any plan to correct this? Not that it’s telling us about. My guess is that its policy is to worry about that only after it has been re-elected. If it isn’t, good luck, Mr Dutton.

But since we can’t see further than the cost of living, how are we doing? On the face of it, we’re well over the worst. Over the year to December, consumer prices rose by a modest 2.4 per cent.

The rate of inflation is forecast to stay low, meaning the Reserve Bank is likely to keep cutting interest rates in coming months by a total of 1 percentage point or so, which will take a lot of pressure off people with big mortgages.

The government expects wages to rise a bit faster than consumer prices which, if it comes to pass, will ease the cost of living to a small extent. But if many people still feel it’s a struggle to pay their bills, I won’t be surprised.

Why not? Because, over the five years to last December, consumer prices rose by about 4.5 per cent more than wages did. Until that “wage deficit” is closed, many people will still be feeling the pinch.

This makes it all the more important to understand why the government’s move to continue its energy rebate for another six months isn’t as good as it sounds.

The rebate – which is temporary and paid directly to your electricity retailer – began from July 1 last year. It thus caused quarterly electricity bills to be $75 less than they otherwise would have been.

Its extension for the last two quarters of this year won’t stop your bills being higher than they were because your retailer has increased its prices. But it will stop your bill also being $75 a quarter higher than otherwise. Thanks to generous Anthony and Jim, that unpleasant surprise won’t come until you get your first quarterly bill in 2026. (Come to think of it, maybe the new tax cut is timed to ease the pain of higher power bills.)

As for Trump and his planned trade war, the T-word doesn’t get a mention. Rather, Chalmers worries about “heightened global uncertainty” and “escalating trade tensions”. Why the obfuscation? Maybe Chalmers wants us to see what a great job the government’s done fixing the cost of living and doesn’t want that terrible man raining on his parade.

Actually, it’s too early for concrete actions. We don’t yet know how stupid Trump intends to be, let alone whether the other big economies intend to worsen it by giving as good as they get (otherwise known as cutting off your nose to spite your face).

So right now is the time to think hard about our options, not announce a response. We do know our government won’t be tempted to retaliate, and Chalmers is right to say we must make our economy more resilient to shocks from overseas.

But spending on a new “buy Australian” campaign? It may make uninformed voters feel better, but I doubt it will fix the problem.

This government is timid, uninspired and uninspiring. This budget fits it perfectly.

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It's official: supermarkets are overcharging. So change the subject

Why does a government release a highly critical report on the conduct of Woolworths and Coles on the Friday before a budget that will lead straight into an election campaign? Short answer: not for any worthy reason.

One worthy reason could have been to show Anthony Albanese and Treasurer Jim Chalmers really wanted to do something about fixing the cost of living, by making the question of what we should do about our overcharging grocery oligopoly a major issue for discussion in the campaign.

Since the remedies proposed by the Australian Competition and Consumer Commission in its report seem so inadequate, should the two grocery giants be broken up? As, indeed, Opposition Leader Peter Dutton says he would do if elected.

As the business press so indelicately put it, the competition watchdog’s mild-mannered recommendations despite all its evidence of what the punters see as “price gouging” meant the supermarket giants had “dodged a bullet”. But should they have? Let’s discuss it.

Sorry, I’ve been observing the behaviour of politicians for too long to believe Labor’s motives for releasing the report at such a time could possibly be so pure. It’s more likely the reverse: Labor wants to close the issue down.

What Labor did last week looks suspiciously like what’s known in the trade as “taking out the trash”. When you’ve got an embarrassing report you hope won’t get much notice from the media, you release it on a Friday, when the media’s busy packing up for the weekend. The reporters ought to return to the topic on Monday, but they don’t because of their obsession with newness. Spin doctors 1; press gallery 0.

Or governments can achieve the same result by releasing an embarrassing report at a time when everyone’s attention is turned to a much bigger issue – say, a budget, or an election campaign.

But why didn’t Labor just keep the report to itself until after the election? Because, I suspect, it wanted to show it had been on the job, investigating complaints about supermarket overcharging.

And it probably wanted to arm itself to reply to Dutton’s promise to break up the two giants. “We had the competition watchdog investigate the matter, and it explicitly declined to recommend divestment. But it did make 20 recommendations, and we’ve accepted them all.”

(The last time I heard that one was before the 2019 federal election, when the Morrison government released the report of the royal commission into misconduct in banking and said it had accepted all its recommendations. After the election it dropped many of them.)

But if even Labor isn’t game to touch the thought of breaking up Coles and Woolies, why are the Liberals promising to do it? Because they wouldn’t really.

Why does the notion of divestment frighten Labor? Because it doesn’t want to get offside with business. However, in the case of the two supermarket giants, their interests are defended inside Labor’s corridors of power by their union, “the shoppies”, aka the Shop, Distributive and Allied Employees Association.

Trouble is, the report’s findings show there’s a lot to try sweeping under the carpet. The two chains account for two-thirds of all supermarket sales, and their market share has increased since 2008 despite the advent of Aldi. Their profitability is among the highest in the world and their profit margins have increased over the past five financial years.

“Grocery prices in Australia have been increasing rapidly over the last five financial years,” the report says. “Most of the increases are attributable to increases in the cost of doing business across the economy, including particularly production costs for suppliers, which has increased supermarkets’ input costs.

“However, Aldi, Coles and Woolworths have increased their product [margins] and earnings-before-interest-and-tax margins during this time, meaning that at least some of the grocery price increases have resulted in additional profits.”

So if the Libs don’t seize on the report’s findings to step up their claim to want to do something real and lasting about the cost of living, it will be a sign they’re not genuine in their professed desire to break up the grocery oligopoly. A sign both sides of politics want the report and its disturbing findings buried ASAP.

But it’s not just the political duopoly that doesn’t want to know about the pricing power of the grocery market’s big two. Most of the nation’s economics profession don’t want to think about it either. Why not? Because it’s empirical evidence that laughs at their conventional model – whether mental or mathematical – of how the economy works.

There’s a host of contradictions in their model, and the profession long ago decided that the easiest way to leave its beliefs unchallenged and unchanged was to avoid thinking about them. (And for all those economists snorting with derision as they read yet more of Gittins’ nonsense, I have five words: “theory of the second best”. Those words strike terror into the heart of every conventional economist.)

Economists divide their discipline into micro (the study of how individual markets work) and macro (study of how the whole market economy works), but they’ve given up trying to make the two approaches fit together. This groceries report is a classic example of how the two lines of thinking don’t fit.

Every microeconomist studying “imperfect competition” (aka “industrial organisation”) knows oligopoly brings market power and allows firms to avoid competition on price. But every macroeconomist assumes – explicitly or implicitly – that market power isn’t a relevant problem.

As we saw with the conventional wisdom on the domestic causes of the recent inflation surge, the Reserve Bank assumed it was caused by excessive monetary and budgetary stimulus. That is, it was caused by “demand-pull” not “cost-push” inflation pressure.

The fact that, through our own neglect, we have one of the most oligopolised economies in the developed world, is assumed away. We’ve allowed our economy to become inflation-prone, while economists in general, and the supposedly inflation-obsessed Reserve Bank, have said not a word.

But not to worry. We’ll compensate for our negligence by punishing people with home loans all the harder.

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Trump is making a huge blunder. Here's how we seize the moment

By MILLIE MUROI, Economics Writer 

Eventually, Donald Trump will backpedal. Economists get plenty wrong, but one thing most believe – and get right – is that widespread tariffs are stupid. Why? Because they create more losers than winners.

Trump is smart enough to know this. But he’ll look to twist arms with his tariffs until some of his demands are met (seemingly at the top of his wishlist: Mexico, Canada and China curbing illegal border crossings and drug cartels). He’s betting on this happening before Americans start to notice their living standards drifting into the gutter.

For Australia, now’s the time to swing. Not at Trump, but towards the neighbours we’ve neglected. To its credit, the federal government isn’t playing into the president’s games: as Treasurer Jim Chalmers said this week, the tariffs on Australian steel and aluminium are disappointing, but our response will not be to raise tariffs on the US in a race to the bottom.

Why? Because taxing imports backfires. Tariffs make imports more costly for consumers as well as businesses relying on imported fuel, ingredients or goods to make or sell their products. Sure, tariffs on steel might shield steel producers in the US, but it will stop those workers and resources from flowing to more efficient areas – and at the expense of Americans needing steel to build (and buy) machinery, houses and cars.

Remember – the reason we trade is to specialise in things we’re better at doing or producing than others. For Australia, these are mostly resources we dig up and ship off. Iron ore accounted for more than one-fifth of our exports by value in 2023-24, followed by coal and natural gas, both at about one-tenth each. We can then use the money we make to buy the things we’re less good at making.

That includes cars. We produced them for decades in the 1900s, but eventually the Australian car manufacturing industry stalled and shut up shop in 2017. It was just too costly to continue pumping out cars, especially when we could ship them in and focus on the stuff we could produce better than everyone else. In 2023, cars made up 6 per cent of our imports, just behind the one-tenth spent on globetrotting and similar share spent on petrol.

Luckily for Australia, a drop in exports to the US isn’t going to hobble us. Only about 6 per cent worth of our exports were destined for the US in 2023 – far less than the one-third shipped up to China and 12 per cent sent to Japan. China’s appetite for Australian exports is mostly for commodities such as iron ore, natural gas and gold.

However, slapping tariffs on US imports to Australia would take a toll on us. While one-quarter of the value of our imports comes from China, about one-tenth flows from the US and another tenth from Japan. Responding to the US with tariffs of our own would make machinery, planes and pharmaceuticals, among other things, more expensive.

One thing that has kept Australia in Trump’s good books, at least until recently, has been the fact we have a trade deficit with the US. That is, we import more from the US than we export to them. The US, in turn, has a trade surplus with us: they export more to Australia than they import to us. But does this really matter?

Well, not really. For example, Australia had a more than $110 billion trade surplus with China and $30 billion trade deficit with the US in 2023. Neither of these things is necessarily “good” or “bad” because both importers and exporters benefit from trade.

But a big trade deficit or surplus can suggest if a country is especially reliant on another country for supplies or income – and therefore more at risk to shocks such as tariffs.

Trump’s tariffs – and threat of more to come – are a chance for Australia to branch out from its biggest trading partner.

It’s not the first time we’ve done it. In the 19th century, Australia was heavily reliant on the UK as a destination for our agricultural and mineral exports. As the UK shifted towards a more protectionist economy with high tariffs in the early 1900s, and stopped giving Australia preferential tariff treatment, we shifted towards some of the countries which are, today, among our biggest trade partners, including the US and those in northern Asia.

Whether Trump stubbornly keeps his foot on the tariff pedal or not, Australia has a good opportunity to build stronger ties with countries in South-East Asia which have expanding economies, growing middle-class populations and are geographically closer.

Many of these countries, including Vietnam, Taiwan and Thailand – which are among those most likely to be hurt by Trump’s tariffs because of the large amount they export to the US – will probably also be more open to strengthening ties with neighbours in the Asia-Pacific. It also makes sense to build stronger ties with our neighbours from a strategic geopolitical perspective as China poses a growing security threat to the region.

The government is already looking for ways to expand free-trade agreements in South-East Asia and reviewing ways we can work more closely with the region. But taking action now is crucial.

A recent visit to Vietnam opened my eyes to egg and coconut coffees (I now make one most days after decades of believing I didn’t like coffee), but the country is also a growing player in pharmaceuticals, making prescription medicines and turning into a manufacturing hub as it transitions away from a primarily agricultural economy.

Vietnam will not, for the foreseeable future, be a replacement for the US: a clear world leader in pharmaceuticals and far advanced in manufacturing. But investing in the capabilities of countries in South-East Asia, partnering with them and fostering connections with its people – including drawing on ties and expertise held by immigrants from the region who can provide insight – is important.

Like past shifts, pivoting away from old friends won’t be a quick process. It will take time, investment and some pain to focus on strengthening trade and ties with new countries, many of which are facing their own challenges and growing pains.

We’ve got the right idea when it comes to exercising restraint on tariffs of our own. But whether Trump backs down soon or not, Australia needs to play a longer game when it comes to trade.

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The outlook for house insurance is much worse than we're being told

The big news on house insurance this week was the response of the insurance industry’s peak body to a parliamentary committee’s extensive criticisms of its treatment of people claiming on their policies after the massive floods of 2022.

The Insurance Council of Australia accepted some of the committee’s recommendations, announced an “industry action plan” and generally promised to be good boys in future. But the consumer groups were unimpressed.

Drew MacRae, of the Financial Rights Legal Centre, said the insurers “have a long way to go to restore trust and confidence in a sector that systematically failed customers during the 2022 floods. Today’s announced plan to get there is welcomed, but ‘trust us’ just won’t cut it.”

Meanwhile, in their pre-election campaigning, Anthony Albanese and Peter Dutton are as one in portraying our insurance problem as a matter of misbehaving insurance companies.

Asked if he accepted a journalist’s claim that the companies had doubled premiums in recent years, “had plenty of money” and “are ripping us off”, Albanese flatly agreed. “We will certainly hold the insurance companies to account,” he added.

Dutton’s response was to threaten to split up the big insurance companies – until wiser heads in his team calmed him down.

Sorry, all this is delusional for some and, for others, a knowing attempt to mislead us on the seriousness of the problem. Have the insurance companies been behaving badly? Yes. Should they be forced to treat their customers fairly? Of course.

But will that fix the problem? No. Have the companies been ripping us off, putting up premiums just to increase their profits? No. They’ve been grappling with a problem they know they can’t solve: you can’t insure against climate change.

The cost of house insurance has been rising rapidly for several years because more bushfires, cyclones, storms and floods have led to more claims. We know that continuing climate change will cause extreme weather events to become more frequent and intense.

So the great likelihood is that house insurance premiums will just keep rising rapidly. The outfit that’s doing most to alert us to the deep trouble we have with insurance is the climate campaigning Australia Institute. Its recent national poll of 2000 people found that while 78 per cent of home owners said their home was fully insured, 15 per cent said they were underinsured and 4 per cent said they were uninsured.

As house insurance premiums rise, more people will become underinsured – many with no insurance against flood damage, for instance – and more will be uninsured. Many of the latter will be people whose homes the companies have refused to insure.

The insurance companies know what’s coming, as do the banks and the government. They know what’s coming, but they don’t want to talk about it before it happens, mainly because they don’t know what to do about it.

Remember, insurance is an annual contract. So if I’m confident there’s little chance of your house being destroyed in the next 12 months, I’m happy to give you the assurance of insurance. But when, sometime in the future, I decide you’re a bigger risk, it will be a different story.

The point is, there’s no magic in insurance. It can do the possible, but not the impossible. The way insurance works is that, if I can gather a “pool” of many thousands of home owners, each with only the tiniest risk of having their house burn down, I can promise all of them that, in return for a modest premium, they’re all fully covered in the event of a major mishap.

A few of them will have such a mishap, but I can pay them out from the pool of premiums and still have enough left to make it worth my while being in the insurance business.

Once the risk of your home coming to grief becomes less than tiny, however, the game changes. When more than a few people in the pool make claims, I make no profit, or maybe a loss. So I can start by making owners with bigger risks pay more than those with low risks, but once your risk is too high, I can either charge you a premium that’s impossibly high, or just refuse you insurance.

Because of their ever-growing record of claims, the insurance companies are well-placed to make a reasonably accurate assessment of how risky it is to cover your house – even to the point of charging more in some parts of a suburb than others.

This means, of course, that home owners in some parts of the country will be charged far more than others. Premiums will be highest in northern Australia, where cyclone risk is higher, but also in areas where flooding or bushfires are likely. And even people living well away from harm in the inner city will be paying more to help out.

All this is why we should be doing more – and have been doing more this long time – as our part in the global effort to limit climate change. But what should we do to reduce the damage that’s arrived or is on its way?

Well, certainly not having the government subsidise insurance. That would just encourage people to keep doing what they should stop doing. Taxpayers’ money should be used only to help people get away from the risk of fires and floods.

Just as fighting a fire is easier than fighting a flood, bushfires are less difficult to get away from than floods. We must start by preventing anyone else building in risky areas.

Then we need to move people off the flood plain. As for Lismore, the whole town needs to be moved to higher ground.

But here’s a tip. Don’t hold your breath waiting for Albanese or Dutton to raise these issues in the election campaign. That’s not the way losers behave. Much easier to shift the blame to the greedy insurance companies.

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Argy-bargy on the way to next week's off-again, on-again budget

According to the business press, Anthony Albanese was desperately hoping for an early election so he could avoid next week’s budget and the drubbing he’ll get when Treasurer Jim Chalmers is forced to reveal projections of a decade of budget deficits.

If you think that, you don’t know much about budgets. But, more to the point, nor do I expect to believe the budget’s forecasts for the economy in 2025-26.

The first reason I don’t believe Albanese was living in fear of having to reveal a decade of deficits is that, although the business press may be shocked and appalled by budget deficits, the voters have never been. That will be particularly so at a time when all they care about is the cost of living.

The business press and the rest of the partisan media will make a great fuss, but the punters won’t care – just as they didn’t when, in the previous government’s last budget of March 2022, treasurer Josh Frydenberg revealed his own projections of a decade of deficits.

Funnily, I don’t remember the business press making a big fuss back then, perhaps because it only feels a need to worry about deficits when a government of the wrong colour is in power.

But if you’re wondering why, three years later, we still face a decade of deficits, I’ll give you a clue: what the two projections have in common is the stage 3 tax cuts. If all you care about is balancing the budget, the tax cuts were unaffordable then, and they’re still unaffordable now.

Of course, the “Trumpist” logic of big business is that tax cuts are always responsible, whereas increased government spending, for any purpose, is always irresponsible.

Another reason for doubting that Albanese thought having an economic statement rather than a full budget would allow him to avoid admitting to the prospect of a decade of deficits is the requirement under the Charter of Budget Honesty for the secretaries of Treasury and Finance to produce a PEFO – a pre-election economic and fiscal outlook statement. That statement would have revealed. . . the projected decade of deficits.

What the press gallery seems not to know is the reason for the modern practice of governments providing an economic statement immediately before announcing an election – unless, of course, the election is called immediately after a budget’s been delivered, as will happen next week for the third election in a row.

Why must the officials’ PEFO always be preceded by a government economic statement in some form? So an excitable media won’t leap to the conclusion that any deterioration in the budget balance since the previous government statement represents the econocrats revealing something their political masters were hiding.

Guess what? The politicians’ statement and the PEFO a week or two later are always almost identical. (And I bet it was the econocrats who suggested the idea to the pollies. The last thing the bureaucrats want is to embarrass the duly elected government of the day.)

But enough already on the politics of budgets. Better get to some actual economics. I don’t expect to believe the economic forecasts we see in next week’s budget. Why not? Because they’re highly likely to be wrong. Economists are hopeless at forecasting even just a year ahead because the models they rely on – whether mental or mathematical – are so woefully oversimplified.

That being so, the forecasters’ rule of thumb is to predict “reversion to the mean”. If last year was below average, this year growth will be up; if last year was above average, this year growth will be down.

As well, when times are tough, official forecasts tend to err on the optimistic side. (This is no bad thing when, to some extent, their forecasts tend to be self-fulfilling; the last thing we need is the government predicting death and destruction.)

But I’m under no such constraint. And I can’t see the economy getting out of second gear in the financial year ahead. The obvious reason for expecting further weak growth is the effect of all Trump’s antics. But this factor is easy to overestimate. Unlike some countries, we don’t do much trade with the US.

The media have tended to exaggerate the likely effect on us of all Trump’s off-again, on-again tariffs to make it a better story. The ultimate effect on us will come mainly via China, our biggest export destination, but the Chinese have their own ways of protecting themselves in the unending tussle with the Yanks for the title of top dog.

What’s likely to have a bigger effect on us is the uncertainty about how Trump’s craziness will play out. Uncertainty has real effects when it prompts businesses and even households to delay investment decisions until the prospects are clearer.

So there will be some adverse effect on our economic growth. Even without Trump, however, it’s too easy to sound wise by making a big thing of what’s happening in the rest of the world. Never forget that roughly three-quarters of all the goods and services we produce are bought by Australians, while roughly three-quarters of all the goods and services we buy are made by Australians.

On the positive side for economic growth, it can’t be long before the Reserve Bank cuts interest rates back to their normal or “neutral” level. But that suggests a total cut of only 1 percentage point or so. It won’t set the world on fire.

Similarly, the parties’ many election promises will add to government spending and act as a stimulus to the economy and private spending. But again, don’t let the modern practice of exaggerating the significance of government policy measures by quoting their expected cost “over four years” mislead you.

From the perspective of the budget’s immediate effect on economic growth, it’s only the cost of the measure in the first year that matters. And, because we’re measuring annual growth, it’s only any increase on the first year’s spending that matters.

The fancy mathematics economists indulge in is overrated, but simple arithmetic isn’t.

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Fixing the economy is like training for a marathon: not much fun

By MILLIE MUROI, Economics Writer

It used to completely baffle me how addicted runners seem to be to their sport. My dad, who has run nearly 200 marathons, used to drive my brother and I to park runs at the crack of dawn as kids. Not my idea of fun.

But the more I think about it, the more I realise running is like competition reform: often a pain in the glutes, but a habit that’s rewarding (and actually a bit enjoyable) if you stick the course. In August, I’ll be attempting – if all goes to plan – my first marathon.

Running is what Dr Andrew Leigh, former economics professor and now assistant minister for competition and treasury, would class as “type one” fun. Following him on Strava – Facebook for fitness buffs – is proof of this: for Leigh, running is intrinsically fun.

For me, it has long been “type two” fun: unpleasant in the moment but satisfying after the fact – much like competition reform for economists, as Leigh points out in a speech he gave to the Economics Society of Australia in Perth this week. “It’s no policy paradise or island stroll, but it’s no data desert either,” he says of reform: it’s hard work at the time but worth the effort.

The Hilmer reforms in the 1990s are a good example. While the process took nearly a decade and there was plenty of disagreement, the pay-off was massive. Leigh says it permanently boosted average annual household incomes by roughly $5000.

Just as you might be pushed to perform better in a race against other people, greater dynamism and competition is generally a good thing for a more productive economy.

One lesson from those reforms was that money talks. Much like a promise agreed to (but not yet fulfilled) by my parents to pay me $5 for every second I take off my “per kilometre” pace, incentives matter. Turns out I can run much faster when I’m financially compensated for it.

In the late 1990s, the Australian government made national competition policy payments to states and territories based on their populations – but only if they made satisfactory progress on their reform commitments. This helped push through changes such as removing restrictions on retail trading hours, setting up the national electricity market and abolishing controls on the price of milk.

Today, Leigh says the Australian economy faces different challenges. And while reform may not be anyone’s idea of “type-one” fun, it can make us better at what we do.

That is, the easier it is to switch jobs, and the less dominated an industry is by a fistful of firms, the better it is for our economy. Why? Because it keeps businesses on their toes, pushes them to work harder and smarter, and allows workers to move more easily to jobs that are a better fit.

And as Leigh points out, we’ve become better at crunching the numbers. “Using bigger datasets, better econometric techniques and updated theories, economists have provided new insights on trends in market concentration and the relationship between competition and productivity,” he says.

This is important because it’s difficult to make improvements (in running and in economics) without data.

We know from economists Dan Andrews (not that one) and David Hansell’s look at firm-level data, for example, that job switching rates have dropped in recent years. And we see from Jonathan Hambur’s look at tax data that Australian industries dominated by a handful of big players have tended to increase their prices the most.

The hard work, of course, is making the changes we need. Tracking my running form during runs has been weirdly fun. Actually fixing my technique? A bit tedious.

Last year, the government ramped up the country’s merger reforms so that businesses above a certain size as measured by their turnover – or buying a business over a certain size – would have to (from January 2026) notify the Australian Competition and Consumer Commission whenever they wanted to merge. That is, notification would no longer be voluntary.

This was partly thanks to a database built by the Treasury’s Competition Taskforce, the Reserve Bank and the Australian National University, which found about 1500 mergers were happening every year, many involving big firms. Yet only about one in five were voluntarily notifying the competition watchdog.

Enforcement and the paperwork required for all the additional notifications might be a bit cumbersome. But the hope is that keeping track of big (or serial) mergers will help keep concentration in check.

And the fun doesn’t stop there. Leigh says there’s currently work underway on a tool to identify parts of the economy where there are only a few big businesses. Using geographic data from the Australian Bureau of Statistics, the tool will help to zero in on concentration hot spots: regions or segments of the economy where further merger activity could pose the greatest risk to competition.

Then, there’s “non-compete clauses” which handcuff more than one in five Aussies according to economic research institute e61. These sneaky clauses are written into employment contracts to restrict an employee from joining a competitor, or starting their own business to compete with their ex-employer, usually for a set time or within a geographic area.

Non-competes can protect intellectual property, but their use in sectors like childcare, Leigh says, shows they’re probably also being used unreasonably to stop workers moving to more desirable jobs, too. This, he says, is “type three” fun: that is, no fun at all.

The Productivity Commission reckons reforming non-compete clauses could permanently boost Australia’s productivity and output by allowing workers to move more easily to higher value jobs and making it easier for new businesses to challenge old ones.

It’s one of 19 potential reforms under a new National Competition Policy signed last year, which the commission reckons will increase the income of every Australian household each year by up to $5000.

It might not be easy to execute, but the commission says these reforms would ease cost of living pressures, pushing down prices by between 0.7 to 1.5 per cent over the long term.

Leigh says work is already underway on the 10-year reform agenda, starting with changes like streamlining commercial planning and zoning and making it easier for care workers to move around. In a modest nod to the Hilmer reforms, there’s also a $900 million National Productivity Fund which will pay state governments to implement reforms.

Like training for a marathon, competition reform requires focus, commitment and some sacrifice. The “runner’s high” is still an elusive phenomenon for this amateur runner. But if I can make it through that finish line in August, I’m optimistic the nation can hit the ground running with more of the reform we need for a better-performing economy in the long run.

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How many more cyclones before our leaders finally do something?

Forgive me for being hard-headed while everyone’s feeling concerned and sympathetic towards those poor flooded Queenslanders and people on NSW’s northern rivers, but now’s the time to resolve to do something about it.

As the rain eases, the rivers go down, the prime minister flies back to Canberra and the TV news tires of showing us one more rooftop in a sea of rushing water, the temptation is to leave the locals to their days and even months of getting things back to normal, while we go back to feeling sorry for ourselves over the cost of living and waiting impatiently until the federal election is out of the way, and we stop hearing the politicians’ endless bickering.

But speaking of politics, let’s start with Anthony Albanese. He’s been forced to abandon his plan for an April 12 election because calling an election in the middle of a cyclone would have been a very bad look.

“I have no intention of doing anything that distracts from what we need to do,” he told the ABC. “This is not a time for looking at politics. My sole focus is not calling an election, my sole focus is on the needs of Australians – that is my sole focus.”

Ah, what a nice bloke Albo is. Convinced? I’m not. You don’t get to be as successful a politician as Albanese unless your sole focus is, always and everywhere, politics. It’s because his sole focus is politics that he knows now’s not the time to look political. “Election? Election? If I don’t make out I don’t care about the election at a time like this – I could lose it.”

One thing I’ve learnt from watching prime ministers is that, though they all make mistakes – buying a holiday beach house during a cost-of-living crisis, for instance – they never make the same mistake that helped bring down their predecessor.

Every pollie knows Scott “I don’t hold a hose” Morrison’s greatest mistake was to persist with his Hawaii holiday during the Black Summer bushfires of 2019-20. The ABC has helpfully dug up footage of people in the affected area refusing to shake Morrison’s hand after he turned up late.

Now do you get why Albanese’s been doing so much glad-handing up in the cyclone area?

The election campaign that’s already begun is between two uninspiring men, neither of whom seem to have anything much they want to get on and do. You’re going to fix bulk-billing, are you? Wow. Anything else?

But, perhaps in an unguarded moment, Albanese did say something impressive. He seemed to elevate climate change as a major election issue, saying all leaders must take decisive action to respond to global warming because it is making natural disasters such Cyclone Alfred worse and more expensive to recover from.

Actually, this is the perfect opportunity to make this an election worth caring about. You’ve got a Labor Party that cares about climate change but is hastening slowly, versus a Liberal Party that only pretends to care and whose latest excuse for doing nothing is switching to nuclear power. This would take only a decade or two to organise so, meanwhile, we can give up on renewable energy and abandon Labor’s commitment to cut emissions by (an inadequate) 43 per cent by 2030.

Both sides are likely to lose more votes to the two groups that do care about climate change – the Greens and the teal independents. Labor is delaying announcing its reduction target for 2035 until after the election. If Albanese had the courage, he’d promise a much more ambitious target and make it a central issue in the election.

The point is, Alfred is hardly the last cyclone we’ll see. Extreme weather events – including heatwaves, droughts and floods - have become more frequent and more intense. How many more of them will it take to convince us we need to do more to reduce our own emissions, as well as taking responsibility for the emissions from the coal and gas we export to other countries?

What’s different about Alfred is it hit land much further down the coast than usual. Reckon that’s the last time this will happen? Modelling by scientists at UNSW’s Climate Change Research Centre suggests that weakening currents may lead to wetter summers in northern Australia.

Other researchers from the centre tell us “our climate has changed dramatically over the past 20 years. More rapid melting of the ice sheets will accelerate further disruption of the climate system.”

A big part of our problem is the longstanding human practice of building towns near a good source of water, such as a river. Rebecca McNaught, of Sydney University, tells us Lismore is one of the most flood-prone urban centres in Australia.

Dr Margaret Cook, of Griffith University’s Australian Rivers Institute, reminds us that, until recently, 97 per cent of our disaster funding was spent on recovery, compared with 3 per cent invested in mitigating risk and building resilience.

That’s all wrong and must be reversed. Armies of volunteers – plus defence forces – emerge after disasters to help mop up. But Cook argues for an advance party that arrives before a disaster to help prepare by moving possessions, cleaning gutters and drains and pruning trees.

She advocates advanced evacuation, permanently relocating flood-prone residents, raising homes and rezoning to prevent further development in flood-prone areas.

“We must improve stormwater management, adopt new building designs and materials, and educate the public about coping with floods,” she says.

As we saw at the weekend, the defence forces have become a key part of the response to natural disasters. Great. Except that, according to a review in 2023, the Australian Defence Force is not structured or equipped to act as a domestic disaster recovery agency in any sustainable way.

It could be so structured, of course, though it might take a bob or two. And that’s before you get to the problem of houses that are uninsurable and insurance policies that are merely unaffordable.

The more you think about climate change, the more you realise it’s going to cost taxpayers a bundle.

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Maybe the inflation surge didn't happen the way we've been told

According to Reserve Bank deputy governor Andrew Hauser last week, we’ve entered a world characterised not just by volatility, complexity and uncertainty, but also by “ambiguity” – a world where “you don’t know the model”, meaning that “judgment and instinct are as important as formal analysis”.

At last, someone is talking sense.

Academic economists may be locked into their maths and econometric models, but practising economists know it ain’t that simple. Economics is as much an art as a science.

Economics would be much easier if only human consumers and businesspeople behaved like rational automatons, reacting automatically and mechanically to known incentives, as you implicitly assume they do when you use a set of equations to guide you through the inevitable uncertainty caused by the lamentable truth than the humans who constitute the economy are . . . human.

Keynes reminded his fellow academics of the need to take account of people’s “animal spirits”. Anyone familiar with markets knows they tend to alternate between periods of optimism and pessimism. I prefer to say that maths without psychology will usually get it wrong.

Contrary to the assumption of the simple model that dominates the thinking of almost all economists, humans are not rugged individualists who decide for themselves the best thing to do, then do it without regard to what anyone else is doing.

In reality, consumers and businesspeople are heavily influenced by what other people are doing. We’re susceptible to herd behaviour, fads and fashions. And we live in a permanent state of uncertainty.

In their landmark book, Radical Uncertainty: Decision-making Beyond the Numbers, John Kay and Mervyn King say it’s not true, as economists assume, that businesses are “profit maximising”. That’s not because they wouldn’t like maximum profits, but because they don’t know the magic price to charge that would do the trick.

As the punters often forget, when a firm raises its price, it’s taking a risk. It’s taking a bet that what it gains in higher revenue won’t be cancelled out by the sales it loses from customers unwilling to pay the higher price.

In the real world, firms feel their way with price increases, hoping to avoid going over the top and ending up worse off. But get this: they feel a lot more comfortable putting up their prices when everyone else is putting up theirs. You know, like our firms were doing a year or two ago.

Hauser says that, at present, “we don’t know the model” but, in fact, the Reserve and everyone else are using the same orthodox, mainstream model to explain why, after staying low for almost 30 years, the annual rate of inflation took off in late 2021 and reached a peak of 7.8 per cent by the end of 2022.

As I’ve written incessantly, this first inflation surge in three decades was caused by the COVID-19 pandemic (with a little help from Russia’s attack on Ukraine). The pandemic caused worldwide disruptions to supply, in turn causing the prices of many goods to leap. The second factor was the massive monetary and budgetary stimulus the authorities let loose to keep the economy alive during the lockdowns.

This conventional wisdom is easily accepted because it blames most of the problem on the government. Inflation surged because the authorities cut interest rates and increased government spending by far more than proved necessary. All of us borrowed more and spent more, causing demand to run ahead of supply and prices to rise.

But I’ve long suspected this isn’t the whole story, or even the main story. So, since even the Reserve Bank isn’t sure we’ve got the right model to explain what’s happening in the economy, let me show you my model, which puts most emphasis on psychological factors.

When people in many countries were confined to their homes, they could still use the internet to buy goods, but they couldn’t spend on personally delivered services. So spending on goods surged to levels far greater than businesses were used to supplying. And, since most manufactured goods are imported, we got shortages of ships and shipping containers to go with shortages of cars, silicon chips, building materials and much else.

When Russia’s invasion of Ukraine caused oil and gas prices to soar as well, the media went for weeks with stories of how much prices would be rising. Reporters would go to industry lobby groups, whose shills would regretfully affirm that, yes, prices would be rising hugely. The ABC gave much publicity to some wiseguy claiming the price of a cup of coffee would jump to $8. Great story; pity it was BS.

I could see what was happening at the time. Businesses were using the media to soften up their customers for big price rises. They were setting up a self-fulfilling prophecy.

Only in recent times have academic economists begun to understand the important role played in the economy by “signalling” – a role not captured by their equations. Not only were firms signalling to customers that, due to causes entirely beyond their control, big price rises were unavoidable, they were signalling to all their mates that now would be a great time to whack up their own prices.

But my alternative explanation doesn’t start there. Remember that, for seven whole years before this latest price surge, the inflation rate was stuck below the bottom of the 2 to 3 per cent target range, despite the Reserve’s efforts to get it up.

Why was inflation unacceptably low? My theory is it was another self-fulfilling prophecy. Businesses weren’t game to raise their prices because no other businesses were raising theirs. Everyone was waiting for some inflationary event to give them some cover, but nothing turned up.

Until the pandemic’s supply disruptions and the Russia-induced jump in oil and gas prices turned up. As soon as it did, everyone breathed a sigh of relief and began wondering how big an increase they could get away with.

The irony is that the pandemic-induced supply disruptions – and even, to an extent, the oil and gas price rises – proved temporary and were reversed. Leaving all the unrelated price rises to stand.

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