Ross Stitt says that the Australian Treasurer is lacking the time or the fiscal discipline to run surpluses in the current good times, to hold back the tide of the disaffected who are attracted to even more deficit spending

Kiwis could be forgiven for wondering what’s going on in Australia. House prices are tumbling at a record rate, inflation and interest rates are rising, and the Australian dollar is worth NZ$1.24. 

And One Nation, a right-wing anti-immigrant party with few substantive policies and even fewer credible politicians is thriving. It frequently outpolls both Labor and the Coalition, Australia’s traditional major parties.

All the news this week has been bad.

On Tuesday the Board of the Reserve Bank of Australia unanimously raised the cash rate by 25 basis points to 4.6%. That’s the fourth rate rise this year, and it takes the cash rate to a 15-year high.

The RBA’s decision was driven by inflation that continues to sit well above the RBA’s target range of 2-3%. 

The wisdom of this decision was confirmed on Wednesday by the latest inflation data released by the Australian Bureau of Statistics. In the 12 months to August the consumer price index rose 4%, up from 3.5% in the 12 months to July. The ‘trimmed mean inflation’, the RBA’s preferred measure, remained at an unacceptable 3.6%.     

The RBA is not alone in lifting rates. The US Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of New Zealand have all raised rates recently. 

However, Australia now has the second highest central bank rate among developed countries and well ahead of comparable countries like the UK at 3.75%, Canada at 2.25%, and New Zealand at 2.75%.

In announcing the latest rate increase the RBA stressed that it ‘will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed’.

Many economists believe there’ll be a fifth hike in November when the RBA meets again on Melbourne Cup Day, and possibly a sixth in 2027. 

What’s driving the rise in inflation and interest rates? It depends on who you ask. 

The Labor Treasurer, Jim Chalmers, puts the blame for high inflation squarely on the war in Iran. He claims it has nothing to do with government policy.

Unfortunately for Chalmers, the RBA sees it differently. In her press conference on Tuesday RBA governor Michelle Bullock said high inflation ‘has been driven by domestic capacity pressures’ and ‘the inflation impulse from the Middle East conflict is in addition to this’.

There’s no doubt that spending by both the federal government and state governments has been a major factor in creating those ‘domestic capacity pressures’. The federal government continues to run large budget deficits that stimulate economic demand at a time when the RBA is trying to suppress it. 

In a recent interview with the Institute of Public Affairs a former RBA governor Philip Lowe was unequivocal. He said that ‘government spending has been adding to demand progressively over time, and that’s putting upward pressure on inflation’. In his view the government is running ‘sizable’ budget deficits at a time it should be running ‘sizable’ surpluses.

This is a view shared by many economists and financial commentators.

Crucially, government fiscal stimulus is occurring during a period of stagnant productivity growth. 

There are numerous adverse consequences for the government of rising Australian interest rates. A key one is the additional downward pressure it places on already sagging house prices. The associated negative wealth effect will likely reduce consumer confidence and consumer spending, and therefore economic growth. 

Higher interest rates will also flow through to the cost of servicing government debt. That translates into either higher government budget deficits or less government spending elsewhere.     

To add to the Treasurer’s mounting woes, the RBA governor believes a rise in unemployment to 5% may be necessary to contain inflation. 

The Treasurer strenuously denies his culpability in all this. But his denials are being met with increasing cynicism. As the bad economic news grows and voter anxiety rises, his constant attempts to ‘spin’ the situation are causing the government real political damage.

And enhancing the prospects of One Nation.

There’s a lesson here for mainstream political parties. Government spending, including on generous untargeted cost-of-living relief measures, can be popular with voters. It has become widespread in liberal democracies, particularly before elections. Indeed, voters have been conditioned to expect government largesse.

But there are limits to what governments can achieve and dangers in ignoring the consequences of their actions.       

By stimulating domestic demand without proper regard for the implications for inflation, Australia’s Labor government now faces multiple problems – a continuing cost-of-living ‘crisis’, rising interest rates, rising unemployment, falling house prices, and higher government debt servicing costs.

Not to mention open conflict with the RBA. A public spat with an independent institution is never a good look. Or a vote winner. 

The Australian Treasurer needs to stop digging and start listening. Unfortunately for him, solving the country’s current economic problems will take both time and fiscal discipline. It’s not clear he has enough of either.      

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.