The election is over, but inflation is still dominating the economic story

From his old days working in Wayne Swan's office, Jim Chalmers no doubt has the words "debt" and "deficit" burned into his mind. Now there's a third one: "inflation".

Returning as treasurer after a triumphant election, next year's budget loomed as an opportunity to stake a claim to the sort of bold reform he hinted at ahead of the round table he convened in August.

That may still happen. But Wednesday's mid-year budget was a harsh reminder that the spectre of inflation, which hampered the treasurer throughout his first term, has not yet been vanquished.

Treasury revised up its expectations for inflation in this year and the next, warning that while at least some of the recent elevation was temporary, there were signs that price pressure would continue for services and for new homes.

Budget forecasts now expect inflation of 3.75 per cent through this financial year, up from 3 per cent predicted at budget. The forecast for the next financial year is also higher, at 2.75 per cent up from 2.5 per cent.

And so Chalmers fell back on familiar words like "restrained" and "responsible", offering little in the way of new measures and determined to emphasise that all the new spending was "what any reasonable person would consider to be unavoidable".

The CSIRO got $233 million in a bid to stave off its job cuts, and a few health, family violence and Indigenous programs were rolled over, but little else beyond election commitments was new.

The mild opening salvo is a sign that the treasurer is starting his second term as he ended his first — ambitious to do more, but with one hand tied behind his back.

Debt and deficit

As treasurer under Kevin Rudd and Julia Gillard, Swan's budgets slid further and further into the red. There was a reason — the costly stimulus package which had helped stave off a recession — but it was political poison and has lived long in the Labor memory.

On the raw numbers alone, Chalmers has avoided that pitfall. From his four budgets, he can boast two surpluses. No other treasurer since Swan has managed one.

But that has hardly seemed to matter, with Labor's first term devoured whole by what any politician, pundit or pollster will tell you is the only game in town: the cost of living.

For the first little while, the Albanese government was granted some beginner's grace. Nobody could view the inflation spike as Labor's fault given it predated them.

But as time wore on, and both prices and rates went higher, the government had to contend with a public angry about a problem that could not easily be fixed.

Nobody would suggest that a financial crisis like the one that Swan and Rudd confronted in 2009 was easy to handle. The playbook, summarised by Ken Henry's immortal advice to "go hard, go early, go households" was being written on the fly.

But at least there was a playbook — a set of actions available to government that would both actually help and, crucially, feel like it was helping. Rudd's "cheque in the mail" was effective economic policy and effective political branding.

No such luck with inflation, which is the result of an economy running too hot rather than too cold. If Chalmers had "gone households" in 2023 he would almost certainly have made the problem worse.

No fuel to the fire

In fact, some economists believe he did, by offering cost of living support including energy bill relief and tax cuts. RBA Governor Michele Bullock never went that far, but did warn the government off further spending in her own veiled way.

Labor judged it was striking a balance between the economics and the politics, needing something to reassure voters it understood their concerns but holding the budget reins just tight enough that rates could start coming down for the election.

If winning 94 seats wasn't enough evidence that the strategy worked, consider that the Australian Election Study found Labor was rated the superior economic manager by voters for the first time in its 38-year history.

But it came with a consequence for a treasurer who began his tenure signalling a bold appetite to have "hard conversations" about the big picture. If he did harbour dreams of fixing the budget's deep structural strife, a term dominated by inflation nixed it.

The government managed to change the trajectory of government finances in some ways, taking steps to curb spending growth for the NDIS and aged care. But both are still growing fast, and child care has now joined them.

For years to come, the budget will not collect enough revenue to pay for that spending growth. The budget papers project an eventual return to surplus in a decade, but do so only because they assume no tax cuts over that time.

That almost certainly won't happen, as Chalmers himself acknowledged on Wednesday when he said the government was serious about "the challenge of returning bracket creep" and was determined to "keep average tax rates down lower".

But the issue remains that the budget is highly dependent on the income taxes of working people to fund its growing social spending commitments.

And all the while, the economy is struggling to find a way to lift productivity and living standards, a thorny structural challenge of its own.

Unpicking all of that requires the kind of "hard conversations" Chalmers alluded to at the time of his very first budget and put on the agenda at his round table.

It was a high bar to set, given neither side of politics has offered a fulsome answer to these deep problems. Both times, the yardsticks were met with scepticism and scorn in some quarters, including from some ministerial colleagues.

But if the treasurer faces internal barriers to his reform ambitions, the external one posed by inflation is even greater.

Whether the government wants to pursue "legacy-building" reform like universal child care, tax changes, or spending restraint in fast-growing programs, persistent inflation and the accompanying cost of living anxiety make any risks harder to take – and may try voters' patience.