The Strait of Hormuz, between the Iranian port of Bandar Abbas and Oman’s Musandam Peninsula at the mouth of the Persian Gulf, is a long way from Australia. But this narrow waterway, one of the choke points of global shipping, is now causing more than a tickle in the throat of our economy.
The US-Israeli attacks on Iran prompted Tehran to threaten shipping by effectively closing the strait. That, combined with Iran’s retaliatory strikes on Saudi Arabian and Qatari refineries, pushed oil prices above $US110 a barrel at the weekend and, in turn, roiled world markets.
That kind of rise, if at all sustained, flows through to the bowser, transport costs and grocery prices. A compounding complication is the strait’s role as a major channel for fertiliser supply.
With Australians already struggling with inflation, and opposition politicians in the federal parliament and Spring Street focusing on government spending and mountains of debt, the political squeeze is no doubt felt by federal Treasurer Jim Chalmers and his Victorian counterpart, Jaclyn Symes.
But one option they won’t have is to wait things out. Thanks to indecision and inaction of earlier governments, budget repair and tax reform have become challenges that won’t wait.
Both the inflationary and fiscal situations dictate that any new spending plans, even for the best of purposes, must be carefully calibrated.
For Symes, there can be no election year repeat of last May’s budget profligacy, which economist Saul Eslake called “a big middle finger to anyone who has concerns about where Victoria is financially”.
For Chalmers, the scale of the task is historic. As our senior economics correspondent Shane Wright notes, the last substantial overhaul of the tax system at federal level was 26 years ago, under John Howard and Peter Costello.
Having already highlighted the problem of “intergenerational fairness”, Chalmers needs to come up with a package that rewards people who earn a wage rather than collect assets, while also encouraging businesses. That is a very narrow path given the risks of spending when inflation is persistently above the Reserve Bank’s target rate.
Still, bold reform is feasible not only because of the Albanese government’s resounding electoral mandate but because the Greens, whose support in the Senate would be crucial, have already indicated a willingness to support measures such as Chalmers’ redesigned tax on the largest holders of superannuation.
If he is prepared to reach into the thorny areas of capital gains tax, negative gearing and taxation of trusts with the aim of rebalancing a ledger heavily weighted towards Baby Boomers, perhaps he can emerge with the reward of renewed enthusiasm for his party among younger voters.
Chalmers has suggested that some of the productivity recommendations from last year’s economic reform roundtable will be implemented, with one eye clearly on growth numbers that are still fragile and propped up by government subsidies for electricity and gas.
But there is no question that, having ducked the issue with his tiny tax cuts last year, when warning lights were already flashing, come May 12 the federal treasurer will have to cut spending. If growth remains weak or there is a contraction, and unemployment numbers rise again after hitting a four-year high in October, the spectre of stagflation – a stalled economy in which inflation remains stubbornly high – will become more palpable.
Much will depend on events in the Middle East, which are obviously out of Chalmers’ control. But treasurers do not get to choose the world in which they live. It is up to him and Finance Minister Katy Gallagher to show the skill and steel to play the unenviable cards they have been dealt. For the nation’s immediate and future prosperity, the stakes could not be higher.
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