Australians battling a cost-of-living crisis can expect more pain in the short-term, with inflation set to climb beyond historic peaks reached this week, the Treasurer warns.
In a statement to be delivered after an economic update on Thursday, a day after the biggest yearly inflation rise in over two decades, Jim Chalmers will paint a grim picture of the headwinds facing the Australian economy.
And as cost-of-living pressures deepen, Dr Chalmers warns vulnerable Australians being forced to choose between "vegetables and rent" not to expect inflation to ease "in an instant".
But a leading economist claims the new government is hamstrung in responding to the crisis, urging it to look to John Howard as a template for attacking sacred cows, like negative gearing.
The Treasurer said the crisis was exacerbated by international factors - rising inflation and slowing global growth - but had been "turbocharged by a decade of domestic failures on skills, energy, and supply chains".
"Inflation is high and in the near-term will get higher, but the primary cause of this is not higher wages. Nowhere near it," an advance copy of his speech says.
"We don't have an inflation problem because workers are earning too much ... [it] will unwind again, but not in an instant."
The update predicted GDP growth had been cut by half a percentage point over the past 12 months, with the same downgrade also tipped for the coming two financial years.
Data issued on Wednesday also revealed inflation had risen by 6.1 per cent over the past year.
That outstripped the most recent annual wage growth figure of 2.4 per cent, and even a 5.2 per cent minimum wage increase recommended by the Fair Work Commission earlier this year.
Speaking on Wednesday, Dr Chalmers said the development was "not news to millions of Australians".
"This inflation outcome today mirrors the lived experience of Australians who are doing it tough right now," he said.
"The most vulnerable people are making decisions between vegetables and rent."
The Treasurer had repeatedly warned Thursday's economic update will make for grim reading, and economist Saul Eslake said it was a "normal ritual" for new governments to claim "the cupboard is bare".
"What Chalmers probably isn't going to say tomorrow is what he's going to do about the problems he points out," he said.
"He is rather hamstrung by all of the promises Labor has made as to what they wouldn't do."
Treasury secretary Steven Kennedy warned this month of long-term budget pressures, with spending to go above levels seen during the pandemic's first two years. Mr Kennedy suggested the problem could only be solved by raising revenue.
But after its chastening 2019 defeat, Labor ruled out changes to negative gearing and capital gains tax before its May victory.
Dr Chalmers claimed the growing pressures "don't make our election commitments less important, they make them far more crucial".
Mr Eslake accused the former Coalition government of making no effort on budget repair, and conceded breaching promises in the first term would be "political suicide" for its successor.
But he urged Labor to launch a series of reviews, which could lay the basis for a policy reversal, describing John Howard's path to the GST - not a part of the Coalition's 1996 platform after a shock loss - as a template for the new government.
"Having come to government, [he] spent some of the political capital he accumulated to argue for a second term of government in which he would introduce a GST," he said.
"Labor would be very ill-advised to breach any of its promises as to what it wouldn't do in its first term ... but I think it would be sensible to be looking to build a mandate for a second, knowing that the odds favour that [happening]."
That would include a series of reviews during the first term into the "fairest and least economically damaging" means to improve the budget bottom line, he suggested.
The Reserve Bank will make a decision on interest rates on Tuesday, with many economists tipping a rise of 0.75 percentage points.
Mr Eslake conceded "everyone from Paraguay to Armenia is putting rates up at the moment", but predicted a smaller hike in Australia.
"I don't think today's numbers give any grounds for raising the cash rate by 0.75 [points] ... I think they'll probably do 0.50 [points], but that may be the last 0.50 [points] they do," he said.
Labor has been steadfast in refusing to extend a cut to the fuel excise, set to expire in September, which it partly justified through a projected fall in global oil prices.
"Forecasting oil prices is a bit of a mug's game ... I don't want to evade the question but, in all honesty, who knows?" Mr Eslake said.