Jim Chalmers on Australia’s economy, inflation, AI and the Federal Budget

Hello and welcome to a very special edition of CommBank View Economics and Markets. My name is Mandy Drury and I'm absolutely delighted to be your host.

So normally we drill down on one big issue facing the markets and economies each week. But today we're going to take a much bigger, more long-term view as to how the Australian economy can thrive in a new global economic era, where the normal rules-based order has been turned on its head. And of course, with the backdrop of a war in the Middle East now moving into its third month and exporting inflation to most economies around the globe, including ours. So it's only fitting that we are today joined by Australian Treasurer Jim Chalmers in conversation with CommBank chief economist Luke Yeaman.

Welcome, everyone, to a very special episode of the CommBank View Economics and Markets podcast. I'm Luke Yeaman, the Chief Economist of CommBank, and I am joined by a very special guest today, in his sunny home state of Queensland, no less, the Treasurer of Australia, Doctor Jim Chalmers. Welcome.

It's nice to see you again, Luke. Thanks for the opportunity to have a chat.

Great to have you here. There's a huge amount we want to cover in a short amount of time today. We've got big issues in the world. We've got the breakdown of the global rules-based order. We've got the Iran conflict. We've got inflation, AI, and of course, the Budget, which you'll be handing down in just about two weeks' time. But first, I wanted to ask you just to step back and take a bigger picture view. Every day, you're making important decisions that shape the future of the country, the future of the economy. So for our listeners, what would you say is the... nice, easy question to start... What would you say is the sort of underlying economic philosophy that guides you in making those decisions? And what do you want to say for the Australian economy going forward?

Well, for me, if you think about the more than two decades now that I've been working in and around this portfolio, that period of, you know, really quite intense upheaval, those five big economic shocks in in two decades, really, the thing that I have learned, is to take a longer-term view, you know, to try and impose some direction on the disruption. And for me, what that means is making sure that, all of this churn and change that we're seeing in the global economy and in our society to try and make sure that people are beneficiaries of that change rather than victims of that change. If I've got kind of one overriding approach, it's really to try and make all of this change, which is accelerating, to make it work for people rather than against people. And so if you think about how that plays out, if you think about this, you know, oversimplification of Australia's economic history since federation, you know, we're we're trying to build our fourth economy now, the first one colonial, second one kind of increasingly industrial, the third one increasingly global and financial and services based. What we're trying to do now is to build the fourth economy. And so the thing that occupies most of my time and most of my thinking in trying to work out how we make people beneficiaries of change is how we build that fourth economy. And the fourth economy will be powered by cleaner and cheaper energy. It will be transformed by technology, and if we get it right, it will be defined by social mobility. Social mobility is really the thing that got me here in the first place.

Yeah, it's really interesting. And I know you've spoken about this in the past. You know, we we've certainly argued at CBA and I've argued that we are in a new economic era, fundamentally different to the one we've seen before. You talk about the fourth economy and churn and change. So you've talked about some of the opportunities there that are in that for Australia. And you talked about the climate change and net zero transition and so on. What worries you? What's the... You said if we get it right, what's the thing that, if we get it wrong, will really bite for Australia? What could we get wrong in this transition?

Well, I think if, if, if all of this changes being imposed on us and even the change that we create for ourselves, if that creates new divisions, in our economy, but more importantly in our society, then we will have got it wrong. And there's a real risk of that. I mean, you've spent a lot of time thinking about the world, Luke, and you know how some of these economic issues are spilling out into into division and divisiveness around the world, and we need to avoid that at all costs. And so that's why we see those things as interconnected. And if we get it wrong, if we just create, you know, new divisions in our society, economic or social, then we wouldn't have got it quite right. And so the thing that worries me, the thing that keeps me up at night, is we're dealing with three sets of pressures all at once, effectively. We've got the usual cyclical pressures in the economy at the same time as we've got these rolling shocks. You know, you and I probably both used to think about, you know, shocks used to punctuate long periods of time once a decade or rather once every few years.

Exactly right. And now these periods of calm punctuate long periods of shocks.

Yeah. And the last that's going to continue, right? That's going to be the future we're in for at least the next decade, you'd imagine.

Absolutely. It's the normal now. And so if that's the second bit of pressures and then we've got it against the backdrop of these big megatrends. I mentioned energy and technology, but the changing composition of our industrial base, the fragmentation of our geopolitics, a lot of the things that Prime Minister Carney, I think, spoke about in that very impactful speech at Davos. So those three things all at once, the cyclical, the rolling shocks and then these big structural issues at once. And so that's why economic policy is so important, is because we're dealing with those three sets of issues all at once.

Yeah, I strongly agree there. And you mentioned Mark Carney, the Prime Minister of Canada, who I know you, you talk and work closely with your Canadian colleagues, have always had a good relationship there. You know, I think in terms of Australia's place in this new world, you know, he's thrown out a pretty stark challenge to countries like Australia, to middle powers, to say, you know, step up, step in, co-ordinate more, help shape those new rules that we're going to see and, you know, put some constraints around some of the major powers like China and the US to actually step up and step into that space. Do you buy into that view, and do you think Australia's doing enough in that space so far? Because again, to share a personal view, I always think Australia has one of the 15 biggest countries in the world with huge resources. We've probably always been a bit humble and a bit unassuming in this space. So is now the time for Australia to step up and take a bigger role in the global stage?

Well, I think that humility is in lots of ways how we how we think of ourselves. And and that's not always a bad thing to approach these big challenges with a degree of humility. But we do sometimes undersell ourselves in the world. And I didn't see Prime Minister Carney's speech primarily as, as some others did, as a, as necessarily just a big shot at the Americans. I saw it as, really a, very welcome burst of candour about how the world is changing. And for Australia, with such trade exposed, you know, we we've got so much skin in the game. We've been the primary beneficiaries of that long period of calm that preceded these long periods of shocks. And so for us, you know, we play the cards we're dealt in the world to some extent when it comes to the biggest players in the global economy. But we bring a lot to the table as well. And I think we're getting better and better at leveraging our strengths.

Yeah, our economic strengths in particular, but also our ability to...

Is one of those you'd highlight in particular? Was what do you see as Australia's key competitive advantage? You talked a bit about some of the opportunities, but what's the story as comparative advantage now in this new era?

Well, I mean, the easiest one to understand, I think, is critical minerals. And I know you've worked in this space before and, you know, we go to the world with these huge advantages when it comes to critical minerals and trying to value-add to that. But don't forget as well, that we have in the macro sense, you know, we have some big advantages. Our our economy is better placed and better prepared for a lot of these shocks than most other economies. And our budget is stronger, too. You know, when I knew I was going to be speaking with you, Luke, you know, I dug out some of these comparisons that we've talked about before. You know, we've got one of the three strongest budgets in the G20. In the OECD. We've got the 11th lowest tax to GDP, the sixth lowest spending to GDP. We've got lower gross debt to GDP than any major advanced economy. And so we've got a lot of advantages, and we've got a huge opportunity here. We don't want the world to fragment along the lines that Prime Minister Carney and others have spoken about. But it's imperative... our imperative is to make the most of a bad situation. And that's what we intend to do.

Yeah, we're certainly seeing at CommBank in terms of our investors that we deal with around the world. There's a lot of interest in Australia at the moment, given people are looking where the marginal dollar flows as they look to move a little bit less heavy into the US and look for other alternatives around the world. We're seeing Australia as an attractive option for investment. Before we move off the international and come back to some more current issues, I just wanted to ask, you know, relationships matter in this new era, particularly with the big players. We've seen some swings and roundabouts in our relationship with China. In a few words, how would you describe the Australian relationship with China now? And over the next few years?

Stabilised. And, you know, there was a period there where the relationship was not the best version of itself. And we've put a lot of effort into it. I pay tribute to the PM and ministers Wong and Farrell and Marles and others, for putting a lot of work in to stabilising that relationship, because it's possible in the way we engage in the world on economic issues or indeed national security issues, to recognise where our differences lie. They're often genuine. Sometimes they are substantial. But our job, leading a good country like ours, is to make sure that we engage in our national interest. We do the best we can. And I think the last few years has been a story of stabilisation, particularly when it comes to that key economic relationship with China.

And the US? Has some damage been done to that relationship?

The relationship is very strong, with with the Americans. You know, I engage regularly with with Scott Bessent. The PM has had a number of, I think, really successful engagements with, President Trump and other ministers as well. And so, obviously, there's a there's a lot of disruption in the world. There's an element of unpredictability. Some of that is policy unpredictability. Some of that, we're seeing play out right now in very, consequential ways. But overall, I think our relationships in the world are good, and that's because we put a lot of effort into them.

Yeah. Right. So I want to then swing into some more current issues. And obviously, the one that's front and centre of everybody's mind is the conflict in Iran and what it does to global energy markets and what it does for Australia. I mean, we've certainly written at CBA that, and it's it's widely accepted, that the economic outlook from here hinges primarily on whether the Strait of Hormuz reopens in the short term, in the medium term, a longer term, and how close we are to that. No one knows for sure what's going to happen next, but you're privy to a lot of information that that I wasn't. I mean, at this stage, in broad terms, are you feeling optimistic that we'll see the strait reopen sort of in the next 4 to 6 weeks? Or do you think we should be digging in for, and I you preparing to dig in for a longer, a longer event?

Yeah. Well, I mean, I read a lot of the analysis that comes out of the private sector, including the work that's generated by your team at, at CBA. And I think it reflects the view that a lot of people have, including the government, which is that it is impossible to predict with any precision exactly the moment when the war will end in the enduring way and the strait will open properly. And there's been some false starts. There have been some false dawns. There has been a sawtooth pattern in markets. Yeah, I was in I was in DC when, the declaration was made that the strait was open. It was a it was a Friday, the end of a week. And I was in DC. And by the time I landed back in Brisbane, the strait was closed again. And so. And so that's just, yeah, a sense of the unpredictability. And so I don't think anyone knows when it would properly end. But what we are sure of and what makes me quite concerned, if I'm honest, is the end of the war, the reopening of the strait, won't mean this kind of instantaneous normalisation of the global economy. You think about all the issues that are still to play out: sea mines in the strait, insurance costs in the strait, lasting damage done to oil and gas infrastructure in the Middle East more broadly, ... particularly... damage damage to supply chains, lags in supply chains. And so we don't know if the oil shock itself is near term or longer term. But we do know that there will be longer term costs and consequences. And I think they'll play out for some time.

When you say longer term, are you talking three months, six months, 12 months, three years? I mean, some of the damage to infrastructure in gas in particular, in the Gulf, they're talking 2 to 5 years for that to free up. I think oil looks a little more promising. But when you say that to the Australian community, what do you have in mind?

Well, we run multiple scenarios and the variables in those scenarios that we get our friends in Treasury to run are basically, when does the war end? When does the strait reopen properly, and how long does it take for this stuff to get back online. And it won't surprise you with your experience to know that some of those scenarios have, you know, 3 or 6 month horizons and some of them have much longer horizons lasting beyond the next 12 months or so. And it's obviously it's not a cop-out to say there's a lot of uncertainty, then that's that's just the fact of that. And so in our central case, we've still got some consequences playing out for some time. And that reflects the fact that, things won't bounce back, bounce back to normal immediately. And that's, and that's even if you assume that there is something like normal for it to bounce back to that. What we've learned in the last couple of decades is often one shock gives rise to another.

To drill down a bit further, so there's the strait itself, but there's also Australia's fuel supplies. And I think one of the biggest impacts on consumer confidence and business confidence is the fear of not knowing if there'll be fuel coming in the door or not. In the early days of the crisis, I think there was a bit more of concern around that. Probably things have stabilised. The government's done a lot of work, I know, to get more fuel on the door. But I mean, at this stage, how do you see that fuel outlook? Because that's one of the things that would, I imagine, push us into some more severe scenarios. If you had to see restrictions.

Yeah, it's kind of you to reference the work that the government's doing because, you know, every day, most of every day is about chasing barrels on global markets. And, you know, you're out there and ministers Bowen and King and Farrell and Wong and Albo, and everyone, it's all hands on deck. Yeah. Trying to get more fuel. And so I appreciate you recognising that effort. We've got more petrol now than we had at the start of the war. And we've got about the same diesel and about the same jet fuel. But that's only because of a lot of effort. Yep. Private sector effort and government effort. And we can't be complacent about that because the outlook even on that front is, is uncertain. But what we've tried to do tried to keep the place moving. We're in stage two of a four-stage set of contingencies. We'd rather not go to 3 or 4. We don't know how this will play out, but we're in a better position, I think, than a lot of people might have anticipated. And that's because the ships are arriving. We're getting this uncontracted fuel on global markets. Export Finance Australia's doing a wonderful job securing some of those deals. We're engaging with the Singaporeans, the South Koreans and others. As I said, all hands on deck. And that's having a positive impact on our on our supply. We're not complacent about that, but we do have a degree of confidence about what the next few weeks and ideally longer than that looks like.

So it's a stay alert but not alarmed message, sounds like, from outside. Sort of starting to pivot towards the budget a little, which is obviously a very significant budget budget for you. I'm just on this particular topic, you know, are we going to see it's been widely commented that Australia started this crisis with probably not the same level of fuel stocks that other countries did. That's been a long-term position in Australia or across both sides of politics. We haven't invested in those larger storages. Will that be fixed in the budget?

Not sure about fixed entirely, but certainly a lot of the late work that's happening on the budget is to, get into some of these issues and some of these challenges. That won't surprise you. You know, that we we recalibrate the budget depending on the economic circumstances, that this is the biggest this is the biggest, influence in the near term. And so we're putting a lot of thinking on a lot of our work into that. We probably did come into this a little bit more vulnerable than we would have hoped. It's not a it's not a partisan thing to say that we had six refineries under the former government. we ended up with two by the end of their term in office. We were storing our, fallback supplies in in Texas. All of that made us a bit less secure, a bit less resilient, and a bit more vulnerable. And so, we've done what we can in the near-term, in ways that we've just talked about. And, if there are longer-term ways that we can consider some of these questions, of course, that'll be a key part of our thinking in the last few days before we put the budget to bed and hit print.

Yeah. So I just dig into the budget a bit more then. So this is, I think, your sixth budget you're delivering. It seems from the outside, like it's going to be one of the most important, but also the most interesting budgets. There certainly has been a lot of changes of tack. I mean, I imagine when you first started thinking about the budget after the election, it was obviously quite a big focus on reform and productivity. And was this the time to seize some tax reform and do some other big, big changes in that space? Then we saw inflation start to break out again. After looking in a good place, the middle of last year, it started to become a a problem again. And the Reserve Bank delivered back-to-back rate hikes. Now you've got a war. Is it a crisis budget? Is it a reform budget? Is it a is a inflation-fighting budget? How are you juggling? I imagine there's been a lot of changes of tack. How are you just juggling that?

Yeah, I mean, this is really this is really the key question. I mean, I've, really since the election, certainly into the reform roundtable and then over summer, you know, we sketched out a budget that looks a little bit different to where we will land in the second week of May. You know, a lot of work on budgets goes in over the summer. And, you know, a lot of time on the back deck literally sketching out what a budget might look like on those, treasurer notepads.

And versions of the budget speech, I'd imagine?

A few different versions, yeah. And, you know, if you think about it, this war began on the last day of summer. And so ordinarily, budgets are sketched out in summer, locked down in autumn. This one is being recalibrated even in autumn. And so that's different to normal. But there are some common elements, and a lot of the things talked about at the reform roundtable will be familiar to people when they see the budget. And that's because I reject this kind of idea that it's a tug of war between resilience and reform. I think reform is resilience.

You think you can do both?

I think I can do both, and we can do both. Yes. There are near-term efforts. Yes, there are longer-term reforms, but they're both urgent. They're both actually urgent. And I thought what Danielle Wood said and the last day or two, Danielle Wood from the PC said a strong competitive economy is the ultimate source of economic resilience. And she said any productivity package in the budget is also our resilience package. And that's really how we've come at it. So of course, it's not the same budget that we sketched out on the back deck over the summer. But it has some, some common features. And there will be there will be reform. There'll be a big emphasis on productivity. There will be savings. It might not be exactly the same savings. It might not be exactly the same magnitude of savings. But people will recognise some of the themes of the, of the, of the reform roundtable in that period before the war escalated. The other thing you raised, I know you want to get on to other questions. The other thing you raised, which is really important, is even before the war, we learned about our economy, towards the end of last year, we had this big bounce back in private sector activity, dwelling investment, business investment, came back in ways that we really went much faster than we expected. Much faster. And that put pressure on inflation. And we learned from that that we ... the speed limit in our economy was too low. And so even as we deal with these near-term pressures, even if we consider issues around resilience, we need to remember that our overarching goal here is to lift the speed limit on the economy so we can grow more quickly with lower inflation. And so we haven't parked that goal. Yeah. It's a it's really a central consideration of the budget. At the same time as we do some of these other, nearer-term measures. But all of it is urgent.

So it sounds like it's all three. It's, it's a reform budget, it's an inflation-fighting budget, you've got all the all the things coming together, and it's a resilience budget. So I'm sure a lot of people will be happy to hear that, and we'll look forward to seeing it on the night. I do want to come to inflation. But before we do, just to dig into the budget a little more, one thing we've seen is a bit of commentary suggesting that because of this global energy shock, Australia's going to see a windfall to the budget. Certainly during the Ukraine war, when it first broke out, there was a substantial lift in energy prices, commodity prices. It wasn't the main reason or the only reason, but it was certainly a factor in delivering two surpluses. What are you hearing and what's your expectation now? Are we going to see a substantial uplift to the budget from this crisis, or is that not the case this time around?

I think there'll be consequences in both directions. So first of all, the, you know, any upgrade in any year will be a fraction of what you've seen, speculated about. You know, I sometimes read these stories, even by, you know, very good, well-informed people. and I read it and I think, I wish we were getting that kind of bump. But, I should say, for the record, we haven't predicted that. I think that we haven't seen the same degree of jump in iron ore prices, for example, in coal prices.

Some of your counterparts.

Yeah, yeah, I should be I should be fair to you about that too. But, and so the reason I make that point is because not everybody understands that in times of big upheavals like this, in this case in oil shock, the pressures are in both ways. And so, people often count the upside and not the downside. And so it's easy to understand that what's happening around the world will have put downward pressure on growth in our economy. It's easy to imagine that it will, run the risk of slightly higher unemployment. And so those things have consequences for budgets, too. But the one that's often missed, which wouldn't be missed by you or your colleagues, is the exchange rate is higher. And so currently we haven't finished these numbers yet or these forecasts haven't hit stop on any of that yet down in the Treasury building. But my current expectation is that some years, will be worse. Yeah. Will be downgraded and some years might be very slightly upgraded, but to nowhere...

In terms of revenue or in terms of the overall fiscal position?

In terms of revenue. Right. It'll go in both directions depending on the year. Yeah. But nobody should anticipate A big upward revision to revenue.

Okay. That's really interesting. On the spending side, yeah. You've the governments recently announced some fairly big changes to the NDIS. I think generally speaking, the community would agree that the scheme needs support but also needs to be sustainable. There are very large changes and they'll have a big impact on your budget outlook. The question I really wanted to ask is, you know, this scheme though, it has huge momentum. It's been growing. It was 20% year on year that it came down to more like 10 to 12% year on year. You've been targeting 8%, Minister Butler said that hasn't been achieved yet. There was hope of getting down to 5 or 6%. Now you're saying I think the number is 2% on average over the next four years. So I applaud that. I think that's needed. But how how easy is it going to be to get those savings? Because I have to confess, I think that's that's an optimistic and pretty ambitious target. So how confident are you that that can be fully delivered with the help of the states and the community?

Yeah, I think it can be done. It won't be easy, but it's essential. We have to save the NDIS from itself. And, you know, there's an urgency to to getting it back on track so that it can deliver for the people. it's designed to support and to serve. I remember we not that long ago on a Friday afternoon, in the Treasury Building, when we brought together all those market economists, including yourself. This is one of the key things that people were raising, because you can see that it's a big pressure on the budget and the work that Mark Butler and Jenny McAllister and Katy Gallagher and the Expenditure Review Committee and others have done on this is really important and we do it as supporters of the NDIS. And so we've got to get the costs under control. And if you if you take a little step back from that and think about all the spending pressures in our budget right now, the NDIS, that that's the biggest, saving in the budget that we'll hand down. But we've also done work on aged care. We've also got some of the costs of servicing our debt down as well. So you mentioned those percentages. So the NDIS was growing at 22% when we showed up. We got it down near 10%. It will be it will reset itself over the course of the next few years and still around 5% so still growing. Yeah, but growing in a more sustainable way. I think about aged care was growing more than 6%. We got it down to about five. You think about debt. Interest costs were growing about 14%, we got it down to about 10%. So you can see these structural issues in our budget being addressed. It's not easy. Still a lot of pressures going the other way. The hospitals deal, the cost of the aging of our population, all of those sorts of things. But we've made good progress here. And that's why I think the NDIS reforms are so important. They will be extremely difficult to land. But we can't leave it to the next generation to fix what is so obviously, a big challenge in our budget if it's left unresolved. And we don't want it to get so bad down the track that somebody is tempted to not provide, support who desperately need it in our communities.

Yeah. Storms strongly agree with that. And I think get the NDIS. We all have people that we know in our lives have been, you know, taking benefits from the NDIS and have seen their life transformed. So I think we all want to see that continue. But would you acknowledge that by putting in these cuts into the budget bottom line, if you're unable to get even if you make substantial cuts and get growth down to 3 or 4% or 5%, which would still be a big step up, that does expose the budget to a little bit of upside risk down the track.

There are risks in both directions. I don't want to pretend, pretend otherwise. We are conservative with some of our forecasts deliberately for this reason. And in this case, we've got a lot of work to do to make sure that we get it back onto a sustainable footing. And so I don't dismiss or deny that. I think we can do it. But in every budget there, there are risks in both directions. And that's one of them.

Yeah. Of course. The other big budget speculation is around negative gearing and capital gains tax and taxation of housing. I know you're not going to tell me what's in the budget here. It has been quite a bit of media speculation saying that the government will look to return to an indexation model for CGT, sort of, the pre-99 model that existed, but for all asset classes seems to be the current discussion out there instead of the 50% discounts and abolishing negative gearing altogether. I know you won't tell me, but is that close to the mark? Is that sort of heading in the right direction?

Well, you're right that, we will we will talk more about tax reform on budget night. You can't blame me for trying. But to me and to me, you're not the first and won't be the last in the course of the of the fortnight before the budget. There's obviously a lot of speculation. And, the things I would say about the speculation that you've seen, you know, first of all, without signing up to a particular model or to any part of this speculation that we've made it really clear for some time now that we think that there are inter-generational issues in the tax system and in the housing market. Yeah. And we're working through ways to try and address that. Yeah. We've already been cutting taxes. We've changed the superannuation arrangements, investing in a lot more supply and housing. But but there's more work to do there. And so we're working through and finalising some decisions in that regard. I think a bit like what you said about revenue upgrades a moment ago. One of the things that I think is, not well understood in the speculation is that even if we went down the path that has been speculated about in those areas that you've asked me about, people shouldn't expect there to be this huge amount of new revenue show up over the course of the next few years in the budget. And that's because most people, when they think through these sorts of issues, I think about transitional issues and the like. And so there is, there is a welcome debate out there about, the role of tax reform in trying to rebalance this issue. We've got between very generous treatment of assets and less generous treatment of labour income of workers. And we have done a bunch in that regard already in tax cuts and standard deduction and super and all of those sorts of things. But people assume that all of a sudden a huge amount of revenue will show up. Yeah, that you can automatically and immediately give away. And, and most people who think deeply about those tax changes that you have asked me about would understand, that there wouldn't be a heap of revenue.

I think we see that. And I think, you know, also, if we potentially are in a higher inflationary environment generally now with indexation, that that affects some of the numbers, I presume as well. And grandfathering is the other the other issue on people's minds, I mean, you know, with these long lived investments, whether it's superannuation, you know, changes to housing, taxation, I mean, in general, do you think people have, a reasonable expectation that their existing investments will be protected, or is that something that comes at a cost of revenue? Obviously. So you've got to make these trade offs.

Yeah, I mean, without without getting into kind of hypotheticals about policies. I mean, I mean, generally what you try and do is to make sure that there are, that we recognise the decisions that people have taken in the past. But again, people shouldn't read too much into that. You know, whenever, whenever anyone is thinking about these sorts of issues, some of these big tax reforms that have been speculated about, obviously people work through, or think through some of those transitional matters.

Well, I guess we'll we'll find out more on on budget night in a couple of weeks. Weeks time. Before we finish, I just wanna ask one question. I on, I've got a couple more questions on inflation and then one on AI. But before we get to that, on house prices, you talk about intergenerational equity and there's clearly going to be some changes in the budget in this area. There's been quite a lot of work done and we've done it ourselves and others have done it. Treasury's talked about this Grattan Institute, others... Generally speaking, when people look at these sort of changes, they don't see a big movement in house prices. I mean, you know, we estimated maybe 1 to 3% lower overall. So it does bring a bit of downward pressure on prices, but not to the same degree supply does. I mean, in general, do you accept that as a proposition that this is these sort of changes to tax arrangements are going to make a difference, but a relatively small difference, or do you have a different view?

Well, we're not targeting a certain outcome on on price. We're not we're not trying to target a certain change necessarily in price. We care about there being affordable options for people. And really primarily we're focused on supply. The biggest challenge in the housing market is we don't have enough homes, but we're also focused on the composition of the home ownership base. I mean, I think anyone who looks objectively at the way that, home ownership rates have declined over time, and proportionately as well, home owners and owner occupiers versus investors. There's been a long-term trend. And I think that even if you just go back to the, around the turn of the century, those changes that were made to, to capital gains, you can see that that's had an impact in the composition of that.

That's interesting. So supply is the main game, but I think closely related is the composition of owner occupiers. And we've seen that decline over time. And so when we talk about intergenerational issues, you know, again, without kind of preempting, the finalisation of the budget, when we talk about intergenerational issues, the intersection between tax and housing, that the composition of the of the housing market is, is not something that anyone should ignore.

Yeah. That's a really interesting point. And so then bring it back to inflation, which we discussed a little earlier, and linked to the budget. So we got an inflation read, just recently, which, you know, trimmed mean inflation at 0.8% for the quarter, which is a little better than, than some had expected. But still, there's still an inflation challenge there in the system. I assume the Reserve Bank Governor, Michele Bullock, will be watching the budget very closely as well, and looking to see what you do and which levers you pull. You've obviously you are pursuing some pretty significant savings around the NDIS and there'll be some revenue, I presume, from, from housing tax changes, although, as you say, maybe not a big windfall. The big question will be how much of that is going to get saved and how much of that is going to get spent. So, you know, will we see a material improvement in the fiscal position, medium term? so short term, medium term as a result of some of these savings or other spending pressures, so much so that you're going to see some of that that taken away.

I mean, first of all, genuinely the numbers haven't haven't settled yet. Of course. But there are a lot of pressures running in the other direction. And even with very substantial, savings, like the NDIS package, you can see that. You know, coming the other way, a $25 billion hospitals deal, for example, a whole bunch of estimates variations. And so, I think the idea that, you know, one budget can solve all of the structural issues in the economy, in the, in the budget. I don't think people should expect that. We can't just kind of flick 2 or 3 switches and all of a sudden the budget's in this kind of structurally perfect position. It's, reform and budget repair is, is a direction, not a destination. Yep. And so I think that's, that's an important thing to remember. Now, when it comes to the Reserve Bank, I mean, I've been speaking to Governor Bullock regularly, as you would anticipate. And the Secretary of the Treasury has as well. And, and we try and keep Governor Bullock abreast of our considerations. And so, even in the I've had a couple of conversations with her in the last week or week and a bit and, you know, as, as we're making these decisions, we we brief her on them. And so when the budget comes out, it won't be a surprise to her. In fact, I'm pretty sure in all of the budgets I've handed down, this will be number five. I'm pretty sure I've briefed Governor Lowe or Governor Bullock in advance on every occasion, and that's what we'll do at this time too.

Okay. And let just lastly, on inflation take a slightly longer term view.. The stagflation word's come up a lot in the last few few weeks and months, a lot of talk about the 70s. And I think there are some comparison points but some differences as well. I know that senior members of the RBA, you know, Deputy Governor Hauser have been talking quite a lot about inflation expectations recently. And you mentioned earlier the the rolling supply shocks that we've seeing we've seen this constant with the pandemic. We had Ukraine now got the Iran war. We're sort of in this world of rolling supply shocks. So I you do you see a genuine risk that inflation expectations. And I'm not going to comment on monetary policy per se. But do you think that inflation expectations could anchor at any points. And is there an extra role for the government in that, to help with that fight?

Well, I think it remains to be seen on the expectations front. Obviously, that's something the bank focuses very, closely on. And, and, and my job is to play a helpful role in the way that we manage the budget and think about, making sure that, you know, some of these cost of living help, for example, the zakat is temporary and all of those sorts of things. And so we've got a we've got a role to play there. But primarily that's the consideration. What worries me a little bit about this conversation about stagflation is it is it feels a bit oversimplified. And what I mean by that is, you know, if if people are saying, well, we're going to have upward pressure on inflation and downward pressure on on growth, of course, that's that those are the costs and consequences of a big oil shock coming from a war in the Middle East. We saw that in this week's inflation figures. The primary driver of inflation is the hefty price that people are paying in Australia for that war on the other side of the world. But what that simplification doesn't allow for is the tremendous strength of our labour market. For example, you know, I care a lot about the labour market. Close to 4% comes back to that first question you asked me about our reason for being, you know, I care about the people facing part of the economy and the labour market Is the easiest way to understand that. And our labor markets is in extraordinarily good nick, and in a way that's not consistent with how we might have traditionally thought about stagflation. Yeah, we don't have unemployment, you know, galloping 7, 8, 9, 10%. We don't have unemployment as high as other countries with which we compare ourselves. And so that's why I think some of this not to criticise anyone, but some of this discussion can, can risk being oversimplified.

Yeah, I agree with that. And I think that's also why I mentioned the persistence factor. Because, you know, stagflation is also not just an episode. It's a it's a drawn out period, a persistent period of higher inflation and lower growth. Right. So I agree I agree with that sort of broad sentiment. Look, I want to, you've been generous with your time. I wanted to just finish off by asking two quick questions about AI. I think if it wasn't for the war in Iran, would be talking a lot more about AI generally. And I think it's still having a big impact on markets out there. But there's two very quick fire questions I wanted to ask you about that. One is productivity. So we've had this productivity malaise for a decade, not just Australia. It's been a global decline...

A couple of decades.

Yeah. I'm quite optimistic that we will see a lift from AI on the productivity front, maybe not for 1 or 2 years, but in terms of that speed limit, 3 to 5 years from now maybe. But do you see that as well? Do you think that that's going to be the answer to our our productivity challenges?

Not the only answer, but I think it will. I think it will be a positive if we manage it well. And our job is, as governments and decision makers in the private sector, to is to try and maximise the upside, whether that's growth and productivity, but also to minimise the risks, particularly, to people and essentially, workers. And so that's our that's our job. You think about the productivity story. Yes. We've had two decades now where productivity has been nowhere near where I need it to be. But we had productivity come in 1% over the last year, higher than the 20-year average. So not too bad. Not getting carried away. The market is one and a half now. Market sector productivity has gone up five quarters in a row. So these are not world-beating productivity figures yet. But they're better than what we've seen. And so we might be seeing some of the front end of that out. Our thing about productivity AI is a huge part of of thinking about productivity particularly into the future but not the only part. Compliance costs Will be a big focus of the budget. Making it quicker and easier to build stuff. Yeah. Making us more attractive as an investment destination. Some of the things that you talked about a moment ago, these are all parts of the productivity puzzle. And the difference now in 2026 to, yeah, 1986, is that, in order to shift this stubborn productivity underperformance over a long period of time, we're going to have to do a lot of things at once. Yeah, a lot of medium-sized things at once. And what people will see in the budget, if I can land this productivity package in the next week or so, is people will see a genuine effort, to do quite a lot, on on productivity. Part of that is AI, but there's a lot of other stuff in there too.

Yeah, people will be excited to hear that I suspect is particularly on the 'building things faster'. On so many of the things we're trying to do in Australia now net zero transition, defence, housing and housing. It's all about building things more quickly. So that's a good news story. So the very final question I had then is you kind of get around the fact that on AI, people in the community are thinking about what it means for the job security, that thinking about what it means for their children, you know, you've got three lovely children of your own. You're thinking about their careers, I'm sure. So what do you tell people in your electorate in in Logan when they talk to you about AI and, and people around the country when they say I should not be worried about my job? How do you think about that? I know you've written and thought deeply about this in the past.

Yeah. Well, first of all, not dismiss those concerns. You know, those concerns can be can be genuine. There's a lot of anxiety about how the the workforce will change. In its best version of AI makes people's jobs easier and augments jobs rather than have this kind of mass displacement, of workers. It's kind of you acknowledge I've, I've thought about this a bit in the past. I, I wrote a book in.. Yeah, almost a decade ago, with Mike Quigley, about this issue.

You were ahead of the game.

Exactly this issue. And that's because our job as leaders is to help navigate people through these anxieties, to try and capture the upside and minimise the downside. And so I would say to workers in my electorate and around the country, we understand this is a source of considerable anxiety. Amanda Rishworth just convened a, a really important discussion with unions and with the private ... and with businesses about these issues, because unless we can give people comfort about the upside, then we won't capture the full benefit when it comes to the economics of AI and accelerating technological change. That's what the book was about all those all those years ago, back in probably the age of the fax machine.

There will be fire sales going in the bookstores tonight.

Yeah. In, in every room, in all good reminder bins. But I guess the point I'm making is this thing has been developing for some time. These anxieties are not always unwarranted. And so our job is to try and assuage these concerns by making sure that we capture the best version of technological change. And again, to come back to the very, very first thing you asked me. You know, our job is to make people beneficiaries of change rather than victims of change. And AI is one of the easiest ways to understand how we can get that really right or get it really wrong.

Yeah, well, it's probably a great note to finish on and, an optimistic tone for the future. And I really do want to thank you, Treasurer. It's been a real pleasure talking to you today. I know how busy things are in the couple of weeks before budget, so we're really pleased you could join us on the CommBank Economics and Markets podcast, and good luck for budget night. I'll be watching closely from the sidelines.

I really appreciate it, Luke. Thanks for your time.

Thanks. Thank you so much for joining us for this special edition of CommBank View Economics and Markets.