Plea for spending cuts as banks tip interest rate hikes
Economists have called on Finance Minister Jim Chalmers to show greater spending restraint to ease some tensions in the economy and save Australians from further interest rate hikes.
NAB and Commonwealth Bank economists said the modest recovery in growth had pushed inflation above the Reserve Bank’s comfort zone, with the economy already exceeding its speed limit.
Economic teams at both banks now believe the RBA will increase the cash rate in February; NAB’s Sally Auld predicts a follow-on increase in May that would take the benchmark borrowing rate to 4.1 per cent.
At 2.1 per cent per year, the economy is growing faster than the RBA’s estimate of the maximum rate that can be sustained without increasing inflation.
Business surveys have shown that the gap between supply and demand in the economy has narrowed, which has contributed to the recent acceleration in price growth.
HSBC chief economist Paul Bloxham said high capacity utilization suggested the RBA may have already cut the cash rate a little too much.
“Unless capacity utilization is now falling by a reasonable amount, it’s going to be difficult to get inflation to come down from here. And of course inflation is still above what the RBA needs it to be,” he said.
“One way to get there would be additional fiscal tightening, with a material cut in government spending slowing demand, but we see this as unlikely.
“In our view, this indicates that rate hikes will likely be needed in 2026.”
Dr Chalmers said Wednesday’s mid-year budget update would be all about “delivery, accountability and restraint”.
He stated that the government had already found savings of $20 billion and stated that it had made “difficult decisions” such as not extending electricity discounts.
However, new spending measures such as the $10 billion housing supply promised during the election and “inevitable” upward revisions in items such as natural disaster aid will continue to feed the demand side of the economy.
The proof of the pudding will come with what veteran budget watchdog Chris Richardson calls the “truth table,” laying out in undeniable ink the impact of government decisions on the budget’s bottom line.
Since his election in 2022, the Albanian government has spent a net additional $144 billion across six budget updates, Mr. Richardson said.
“This averages out to an extra $24 billion in spending that resolutions add to spending every time the treasurer presents a budget or budget update,” he wrote in X.
“I expect Wednesday’s budget update will be much more serious about NET savings.”
Dr Auld said the recovery in the private sector was now driving demand more than public spending, and the main problem facing the economy was low productivity growth, which constrained it in the short term.
“You can only really lift this restriction in the medium term or long term,” he told AAP.
“I think the treasurer has been pretty clear about looking at the next budget for a bigger picture reform agenda. So I don’t think we’re expecting anything on that tomorrow.”
He said speech ahead of the budget update showed Dr Chalmers intended to roll back spending.
“That tells you, marginally, that the government is doing the right thing for an economy that is probably already starting to face capacity constraints.”
