Shane Oliver warns economic populism could backfire as Donald Trump and Future Made in Australia make a mark

Top economist Shane Oliver has warned populist politics is likely to backfire through higher inflation and worsening inequality as governments across the developed world become increasingly interventionist.

US President Donald Trump lead the upheaval in 2025 with big tax hikes on trade and a campaign to pressure the country’s Federal Reserve to cut interest rates.

Federal Government spending in Australia is on track to make up the largest share of the economy in almost 40 years, not including the pandemic.

That’s come in part due to a flurry of handouts and bailouts for corporations including Nyrstar’s Tasmanian and South Australian smelters and the Whyalla Steelwork, also in SA.

It marks a major move away from the so-called “rationalist” economics of the 1980’s and 90’s — which laid the groundwork for the average person’s disposable income to roughly double in real terms over the 30 years to 2025.

Dr Oliver said Trump’s administration was becoming “socialism with American characteristics” and many of those policies would “worsen inequality rather than combat it”.

That’s best demonstrated by a 15 per cent rise in the S&P500 over the past year, while real average hourly earnings in the US increased 1.1 percent.

“The problem is that populist policies offer no sustainable solution to the frustrations people feel and will ultimately make things worse,” Dr Oliver said.

“If governments play an increasing role in the economy overriding many of the insights from economics . . . it’s likely to mean lower productivity over time resulting in slower economic growth and higher inflation than otherwise.

“In short, lower living standards.”

Pushing for easy money — like Mr Trump’s campaign urging the Fed to cut interest rates — “invariably” led to higher inflation and a worsening cost of living, he said.

Australia’s post-pandemic cost of living crisis followed emergency low interest rates and stimulus, which sparked prices to rise more than 20 per cent over five years.

Price controls over rents — often proposed as a simplistic solution to Australia’s housing crisis — would “worsen things long term by reducing supply”, he said.

Dr Oliver said a focus on short term gains like artificially boosting wages would lead to long term pain through unemployment, and “erratic intervention in the economy” through tariffs and overriding the rule of law would mean “less investment and employment”.

Australia will be grappling with its own economic reform debate after a series of reports by the Productivity Commission and Treasurer Jim Chalmers’ special summit last year.

Growth in productivity — getting the best value from workers, capital and land — was sluggish through 2024 but showed signs of improvement last year.

Economists generally consider boosting productivity as the only sustainable way to increase wages long term.

Close to the top of Dr Chalmers’ list of reforms was the abolition of nuisance tariffs on trade and streamlining construction industry red tape.

Yet tens of billions of dollars have been pledged for corporations through the Future Made in Australia agenda and bodies including the National Reconstruction Fund in a sign that intervention is still on the agenda.

Productivity Commission chair Danielle Wood also warned against the global trend towards protectionism when speaking to The West Australian in October.

“(It will) shift resources from other parts of the economy and that’s very relevant . . . (when) we’re already talking about labour supply constraints,” she said.

“Businesses that get support for a period get very good at coming back and asking for more.”