Opinion: Record govt spending pushes our interest rates to highest in developed world

If we do not wake up soon, the luck of the lucky country might be about to run out, writes Matt Canavan.

Treasurer Jim Chalmers (front) and Prime Minister Anthony Albanese

Australia now has the highest interest rates in the developed world, which is a problem as our government debt approaches $1t, our productivity remains stagnant, and inflation creeps up again.

In the last two months, the interest rate on Australian government 10-year bonds has surged from 4.1 per cent to 4.8 per cent. The total amount of Australian government debt on issue is just under $960bn. If we had to refinance that debt at interest rates that were 0.7 percentage points higher, that would add a massive $6.7bn a year to our interest payments.

That is roughly the cost of the sporting infrastructure for the 2032 Olympics, and the extra cost would be for every year.

Our annual interest payments today are $27bn. We are paying $10bn more each year now compared to during Covid-19 on interest, as interest rates and our debt has increased. And higher government interest payments will eventually flow through to higher interest rates on mortgages, meaning massive extra costs for Australian families, too.

One reason that Australian interest rates are on the way up is because inflation is on the way up, and markets are anticipating that the RBA will have to lift interest rates soon.

The reason inflation is up again is because the government cannot seem to control spending, nor improve Australia’s woeful productivity performance.

In the last budget before Covid-19, the Australian government spent $478bn. In this year’s budget, the Australian government plans to spend $777bn, an almost $300bn increase. There are about 10m households in Australia, so that means that for each your government is spending $30,000 a year extra than compared to before Covid-19.

Some of the increased spending has been unavoidable, with increasing inflation and the need to better fund aged care. But we are also spending billions more on intermittent renewable energy, blowouts in the NDIS and massive increases in welfare payments.

Regardless of the reason, the extra government spending has increased overall demand. While this makes the economy look superficially strong, it eventually just leads to more inflation, which makes everyone poorer. Over the first term of the Labor government, real wages (which take into account the impacts of inflation) are down to 2011 levels.

We have never seen a reduction in Australian living standards this severe.

Climate Change and Energy Minister Chris Bowen is pursuing his net-zero agenda at any cost.

The increased spending could have avoided an inflation outbreak if we had lifted Australia’s productivity. However, our productivity has fallen alongside the decrease in real wages. Our productivity is down 5 per cent since the election of the Labor government.

A few months ago, the government seemed to realise that our shocking productivity performance was leading to inflationary pressures. They convened a productivity summit in Canberra. It now seems that the businesspeople, unionists and economists who attended wasted their time. The government has barely mentioned, or done anything, about productivity since.

The reason for that is probably that if Labor did look closely at our productivity performance, it would undermine Labor’s net-zero agenda. There are only two sectors of the economy that have recorded a negative productivity performance over the past 20 years, mining and manufacturing.

Mining productivity tends to fall in a terms of trade boom because miners extract lower grade ores. But mining productivity is also energy intensive, and it has also been impacted by our shocking 25 per cent fall in energy productivity over the past 20 years.

Energy is not everything in the economy, but it is almost everything. Our pursuit of a net-zero agenda, and its demonisation of fossil fuels, has denied Australian businesses access to affordable and reliable energy. Net zero has pushed up the cost of everything, hurting families, costing us jobs and unleashing inflation.

The most sustainable way to get our interest rates down is to unleash the potential of the Australian economy, and that means ending Labor’s net-zero war on coal, gas and uranium. The Labor Party is now pursuing its net-zero target no matter what it costs our industrial strength, our national security or our living standards.

In recent years, Australia has got away with a lazy and wasteful approach to our energy needs because the world was awash with capital that helped keep interest rates down. As recently as 2021, Australian government long-term interest rates were lower than 1 per cent. Now they are approaching 5 per cent.

A big reason for the excess supply of capital was that the Japanese government kept interest rates low. This led to the so-called “carry trade” where investors would borrow cheaply in Yen and lend to Western countries at higher rates.

The new Japanese government seems intent on ending the “carry trade” and thus ending the luxury of us being able to waste our resources. If we do not wake up soon, and start to run our economy for Australians first, the luck of the lucky country might be about to run out.

Matt Canavan is an LNP senator for Queensland