The fractured Albanese-Chalmers relationship and growing calls for a Labor reset

Some in the caucus want to go beyond a narrative reset. Husic has been calling for major policy shifts on economics and foreign policy, with some ideas far-fetched. He floated the prospect of leadership change, telling this masthead last month that grassroots members should choose Albanese’s successor – rather than allow a neat handover – if he steps down before the next election.

The economic squeeze

These standard factional tensions are all tested by intense economic pressures.

Labor is battling daily headlines on household stress and struggling to shift the conversation into its comfort zones while war, the AI boom, high federal and state spending, and dismal productivity combine to push up interest rates.

Structural economic weakness and falling real wages mean scrutiny will remain on Labor to act decisively. At stake is the goal of lifting the nation out of a slump that threatens Australia’s status as a beacon for rising living standards across the Western world.

Now the conversation has shifted to the prospects of a reset over summer. The ability to course-correct is a pivotal test for the cabinet’s policy creativity and ability to act under severe pressure.

After a lull at the same point of his first term, Albanese recovered from the Voice referendum defeat by unveiling a successful rejig of the stage 3 tax cuts in January 2024. But this time, the budget is in a worse position and popular policies would probably add to inflation.

Budget analyst Chris Richardson has accused Labor of misleading the public by claiming it had found $180 billion in savings when in fact its decisions have made the budget $103 billion worse since coming to power.

Stephen Smith of Deloitte Access Economics says Labor made the mistake of over-spending in previous years when the economy required no stimulus. But with economists Saul Eslake and HSBC’s Paul Bloxham saying a recession is in sight next year, Smith said the current moment may not be the right time to slash too hard, even with the drumbeat of calls to slow spending.

“The government risks getting the timing wrong twice on spending by adding to inflation pressures while the economy was running short of capacity, then cutting spending as growth weakens,” he says.

Emma Dawson, who leads Labor’s official think-tank, the Chifley Research Centre, pushes back on the criticism of Labor’s policy settings. She posits that Labor’s investments in health, skills, student debt relief, green energy and industrial relations meant it had “delivered more for working and middle-class Australians than any government since Hawke and Keating”.

“To reset its relationship with the electorate over summer, Labor needs to sharpen its narrative and tell a compelling story about what kind of country we want to be,” Dawson said, pointing to the unpredictable global environment.

She argues the party needs to prove that “only Labor, as the party that has always reformed our economic structures and institutions at times of turmoil and disruption”, could deliver security and opportunity for working people, contrasted with the offerings of a fractured right flank.

The reset will decide if the Albanese era cements its legacy with a rare third election win or succumbs to an economic shock and sliding polls. Should Albanese’s poor approval ratings slip further and Labor’s primary vote continue to drop, some internal critics wonder if he can last until the election.

Albanese shows no sign of leaving. But Husic noted last month that the prime minister’s standing as a successful post-war Labor leader gives him the authority to exit on his own terms, much like Robert Menzies.

More MPs are starting to quietly talk among themselves and with journalists about whether Albanese may contemplate his position should his personal approval ratings continue to trend downwards next year as the economy struggles. His personal standing has eroded since the Bondi massacre and a budget containing several broken promises. Albanese has not helped with several political missteps such as the Bush Deep “melons” podcast and the Marrickville golf club saga, dragged on by his stubborn refusal to acknowledge mistakes, and the normal wear-and-tear of governing.

One senior party figure said: “The staffer class [of government advisers] has started to talk about Albo and whether he should hang around. What that tells me is their social networks have started to talk about it. Staff are sometimes closer to community sentiment than MPs.”

Such speculation may prove silly in hindsight if Albanese prevails a third time, and one ally told this masthead he was “going nowhere”.

Albanese has not yet campaigned alongside Victorian Premier Ben Carroll ahead of Labor’s likely loss later this month. In NSW, Labor figures have been telling reporters that Albanese is a drag on the vote of Premier Chris Minns ahead of his election in March.

Nowhere is voter grumpiness more acute than in the housing market, where a promise meant to define Labor’s second term is being challenged.

Property market analyst Cameron Kusher describes a perfect storm of higher interest rates and lower house prices that have made housing construction “incredibly difficult”.

The RBA recently forecast dwelling investment to grow substantially this year before declining by about 3 per cent from the back end of next year as property developers struggle to make new developments profitable.

Kusher expects Labor will now miss its 1.2 million housing target by up to 350,000 – a political and social nightmare for Labor.

Data this week showed the biggest collapse in home lending since 2002, with investor loans down 30 per cent and first-home buyer loans down 9 per cent.

It’s not too late

“This is not a moment to panic,” says Bruce Hawker, a veteran Labor strategist of the Rudd era, who argues Labor is in part hostage to international events beyond its control.

“We’re 18 months from an election. Labor has 94 seats and the circumstances are worse for the opposition. They’ve got to stay the course.”

‘But once rates come down, people can start to think differently. What was a miserable six months before can actually turn into, “Oh, this government’s doing the right thing”.’Labor strategist Bruce Hawker

He believes Labor should stick with reforms such as negative gearing and capital gains tax changes, which could help boost productivity over time by reducing savings directed towards passive assets such as housing.

But he says Labor should shed barnacles such as its tax hike on discretionary trusts, which he argues is not worth the political pain at a time when businesses are doing it tough.

Hawker recalls that Albanese benefited from an interest rate cut only a few months before the 2025 election, a scenario that could repeat in 2028.

“I’m not trying to be Pollyannaish,” he said. “It is going to be very challenging for the government.

“But once rates come down, people can start to think differently. What was a miserable six months before can actually turn into, ‘Oh, this government’s doing the right thing’.”

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