How treasurer can take heat off RBA in his next budget
Finance Minister Jim Chalmers is being called on to help Reserve Governor Michele Bullock fight inflation by cutting spending and implementing productivity-boosting reforms in the upcoming federal budget.
The RBA was forced to raise interest rates on Tuesday to control inflation, just six months after its last cut.
Ms Bullock was careful not to place the blame on the government but hopes Dr Chalmers will do two things to help her with the May budget.
Essentially, the reason for the RBA’s drastic change was that the economy’s speed limit was constrained by low productivity growth and higher government spending acted like a turbocharger burning more fuel.
Following three interest rate cuts in 2025, household spending, business investment and home construction have rebounded much faster than the central bank expected.
With private demand rising and public spending still strong at 26.9 percent of GDP, the economy’s engine is running in the red, barely pressing the accelerator.
Despite modest GDP growth of just 2.3 per cent per year, inflation is running away from the RBA’s target.
AMP chief economist Shane Oliver said the most urgent thing the government could do to fight inflation was to cut spending to give the private sector more room to grow.
Otherwise, the RBA will have to raise interest rates again to reduce inflation.
“Then you will withdraw the special request and that could have negative consequences,” he told AAP.
This is easier said than done, with the government facing fierce opposition to restrict growth in the NDIS, an aging population overloading health and aged care services, mounting pressure to increase defense spending and the rising cost of servicing almost $1 trillion in debt.
Schemes such as the NDIS and childcare subsidies are popular with voters but also spray money in an untargeted way.
Dr Oliver said reducing reliance on these ‘in-kind’ payments and increasing means testing should be a priority.
The government has made moves such as reducing the NDIS growth target from eight per cent a year to six per cent to control spending.
But Deloitte Access Economics partner Stephen Smith said the budget should be looked at holistically and determined whether every dollar was spent as efficiently as possible.
The second part of the equation is increasing the supply capacity of the economy.
“What the government can do here is policy reform to help increase productivity, increase investment and improve the business rate at which the economy can grow,” Mr. Smith said.
Dr Oliver said cutting public spending would help increase productivity by freeing up more resources for the private sector, which would be more efficient.
But tax reform is also vital in the long term.
Dr Oliver said shifting the tax burden from income to goods and services would increase incentives for work and investment, as well as reduce intergenerational inequality.
Under pressure from the Greens, unions and economists, Dr. Reducing the capital gains tax deduction on investment properties would also help, he said, as Chalmers thinks.
Mr Smith said it was a valuable reform but would not have much of an impact on productivity.
“We actually need a broader basket of reforms to improve work-related incentives and reward people for work, particularly around company tax investment allowances and other things like reducing personal income tax,” he said.
But he said the Productivity Commission’s proposal for a new cash flow tax to encourage capital spending was not the right idea as it would add too much complexity and worsen the administrative burden on businesses.
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