Dishing the public dosh to force RBA’s hand on rates
A leading economist at a leading bank says there are two ways to solve Australia’s inflation problem.
HSBC chief economist Paul Bloxham says one is to restrict government spending and allow the private sector to continue its recent rally without driving price growth even higher.
The other is that the Federal Reserve will raise interest rates, increasing the cost of living for mortgage holders by thousands of dollars a year and restricting the recovery in private investment.
Finance Minister Jim Chalmers chose not to choose the first option on Wednesday, so Australians will have to settle for the second option.
“We think the RBA will need to raise the cash rate in 2026 as public spending remains strong and slowdown forecasts look ambitious,” Mr Bloxham said in a research note.
“In short, tighter fiscal policy rather than tighter monetary policy can do the job. To put this another way, a slowdown in public spending will lead to more private sector spending.”
The mid-year budget update showed that public spending is forecast to rise by 4.5 per cent this financial year, stronger than expected in the March budget.
But Dr Chalmers said the update meant smaller budget deficits and less debt than expected over the next four years.
This made it “the most responsible mid-year update on record”.
Despite this year’s explosion in spending growth, the Treasury’s forecasts are based on the heroic assumption that the government will exercise extraordinary restraint in the meantime.
Mr Bloxham said spending growth was forecast to come to a near standstill of 0.3 per cent in the next financial year, with a significant pullback in spending and the weakest growth in public payments in more than a decade.
AMP chief economist Shane Oliver said public spending as a share of GDP was well above pre-pandemic levels, contributing to falling productivity, crowding out the private sector and fueling an already overheated economy.
“All of this makes the RBA’s job of keeping inflation low difficult, and if the RBA is forced to raise rates next year it will put further pressure on the private sector, particularly Australian households, to keep their spending in check,” he said.
There are also expenses that the government considers “off-budget”.
The difference between cumulative headline deficits, which include spending generally classified as investments, and headline deficits, which the government attaches more importance to because they are smaller, widened from $85 billion to $93.8 billion in March.
“Unfortunately, some of these expenditures may not be wise investments and may need to be written down – but they still increase the federal debt,” Dr Oliver said.
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