Australia's economy is a basket case again. Will Jim Chalmers take it on?

Australia Broadcast Center

11-05-2025

In his 2004 thesis on Paul Keating's prime ministership, Treasurer Jim Chalmers wrote that Keating could not have "imagined the plethora of reforms" that marked his turn as treasurer without the electoral success and popularity of Bob Hawke as PM.
"Hawke was the ALP's most electorally successful leader ever," Chalmers wrote, and he provided the "the public support which allowed Keating to indulge in his passion for bold policy."
Anthony Albanese hasn't yet won as many elections as Hawke, but in his second election he has won more seats than Hawke ever did.
So, the conditions should be right for another plethora of reforms. But there are three questions that must be answered first. Is Albanese up for it? Does Chalmers have a "passion for bold policy" to indulge? Does the country need it?
Taking them in order, we don't know whether Albanese is up for big reform because he hasn't been pushed, but his first-term caution suggests he's not.
Maybe that will change now that he has another two terms virtually guaranteed, but his decision to meekly allow the factions to push Mark Dreyfus and Ed Husic out of the Labor ministry is not a good start.
Paul Keating certainly thinks so, releasing a statement calling the dumpings 'a showing of poor judgement, unfairness and diminished respect for the contribution of others' and describing the Victorian Right faction led by deputy prime minister Richard Marles as 'devoid of creativity and capacity'.
Anyway, it's hard to imagine Albanese (or Marles) initiating bold policy – if it's going to happen, the Treasurer will have to do it.
He has commissioned the Productivity Commission to do five big reports on productivity and on the morning after the election he told David Speers on Insiders: "I'm looking forward to receiving that because [although] we've got an agenda on productivity, we can do more, and we will do more."
He could have done more already. The Productivity Commission gave him a report in February 2023 with 71 recommendations which will presumably be regurgitated in six months.
Keating's first term was half as long as Chalmers's and was a flurry of reform, starting with the floating of the dollar; Chalmers's three years have been careful, his main achievement being two budget surpluses, now gone.
But Australia was different in 1983, and Keating, after all, was unique.
David Morgan, a Treasury official at the time and later chief executive of Westpac, described his performance driving the 1985 tax reforms through cabinet: "He used rationality, he used his intellect, he used humour, he used his anger, he used his theatrics, he used his spleen, he used his withering language, all of them turn and turnabout, and it was the most remarkable performance I've ever seen in my years inside a cabinet room."
Keating himself told Kerry O'Brien in a series of interviews eventually published as a book: "I am a risk-taker. But the country had its leg pulled for 30 to 40 years. The place was massively uncompetitive, with declining terms of trade. Who else was going to blow the whistle and take this basket case on?"
Does the country need the whistle to be blown again? Oh yes.
These days Australia is not suffering declining terms of trade (the difference between the prices of exports and imports), although it might if Trump manages to destroy the Chinese economy, but it's a basket case again.
Productivity is declining and housing is unaffordable. Economic growth depends entirely on government spending and immigration, and high immigration has not been matched with enough infrastructure and housing to support it; as a result, Australia is divided, defensive, low tech and uncompetitive.
Keating told O'Brien: "My key point was that you could not bring the Australian economy back to growth off the back of public investment and public employment. The primary driver had to be private investment and private employment."
In 2025 the contribution of private business investment to GDP growth has fallen to zero; the growth in real capital stock per person is zero; real per capita income growth is zero; mining investment growth is zero; non-mining business investment growth has halved since Keating was treasurer; the housing debt to household income ratio is five times what it was in 1985; the average house now costs eight times the average income versus three times then.
So yes, Australia badly needs some bold policy again, some of which is obvious and all of which is hard, especially tax reform.
In 1984, before that year's election, Bob Hawke announced a tax summit during an interview on Perth radio station 6PR, without telling anyone in cabinet — including Keating, which infuriated him.
He and a Treasury team of eight then worked an average of 100 hours a week to produce a white paper for the tax summit in 1985, because, Keating said, they simply had to find more tax revenue.
Commonwealth government spending had gone from 23.5 per cent of GDP before Whitlam took office to 30.5 per cent as Howard and Fraser finished in 1983, and the budget deficit was 5 per cent of GDP. Finding enough in spending cuts was impossible.
In the end Keating didn't get the consumption tax he and Treasury wanted — that had to wait for John Howard to break a promise in 2000. But he did get a capital gains tax, fringe benefits tax and dividend franking.
Tax reform is hard — it almost destroyed the relationship between Hawke and Keating, who told O'Brien: "He did everything to destroy that package. Bob got to shockingly low points of bad behaviour. But I could always engineer a better moment with him and kept the show rolling."
He went on: "The public will never understand the value they got from Hawke and me. Eight-and-half years we were together, and the changes were revolutionary. I would kick and shove and gouge, and he would do the same but nevertheless both of us kept our eye on the main chance — the greater good of the place."
Now the treasurer has to find more tax revenue again, not because the deficit is too high at 1.5 per cent of GDP, but because there has to be more spending on housing, infrastructure, technology and the energy transition, while at the same time the budget is being eaten alive by the NDIS.
As for where that revenue will have to come from, there are no mysteries: ending negative gearing, reducing the capital gains tax discount, increasing the GST and/or reintroducing an inheritance tax, 50 years after it was abolished by Malcolm Fraser and Joh Bjelke-Petersen.
And the reason more government spending is needed is immigration.
The doubling of population growth from 1 per cent to 2 per cent a year is arguably essential to keep the place running as the birth rate declines, but it is causing profound structural changes in the economy because it is not matched by any serious planning for the extra people.
The former head of Treasury Ken Henry says he was asked by Kevin Rudd what he thought the sustainable population of Australia was. At the time Australia's population was 22 million. "About 15 million, I told him. Rudd said: "Yeah I agree — 50 million."
"No, no," said Henry. "Fifteen — one-five."
"What?!" said Rudd. "It's already well over 15 million."
"And you think this is sustainable?" Henry replied.
Then he said: "I could imagine … a set of policies that would make a population of 50 million sustainable on this continent. Why don't we build a whole new city of 10 million people in a place that presently has nobody?"
Only the government can build a new city for 10 million people, or do any of the work required to house more people, including building public housing.
Is either controlling population growth or dealing with Australia's number one challenge in 2025, replacing the terms of trade crisis that confronted Hawke and Keating in 1983?
Let's see what the Productivity Commission comes up with later this year, but it probably is.
The cost of housing and over-burdened infrastructure and policing is sapping productivity while making life nasty and brutish, to quote Thomas Hobbes, although no longer short enough to keep population down.
Final word to Paul Keating: "I was in the slaying business. I gave recalcitrants trouble, not the other way around."
More of that, please.
Alan Kohler is finance presenter and columnist at ABC News. He also writes for Intelligent Investor.