Treasurer Jim Chalmers urged to tighten budget purse strings or risk rate rises

RBA governor Michele Bullock conceded rampant government deficits would put prevent future rate cuts, with economists urging Labor to cut its spending ahead of the December budget update.

Treasurer Jim Chalmers has been urged to curb spending after National Acc2.6 per cent year-on-year. Picture: John Gass

Jim Chalmers has been warned to curb government spending or risk aggravating inflation and sparking rates rises, with Reserve Bank governor Michele Bullock conceding high government debt could result in prolonged pain for borrowers.

This comes as Labor will likely remove its $75-per-quarter electricity rebates ahead of the Mid-Year Economic and Fiscal Outlook in mid-December – with economists denouncing the policy as a “smoke and mirrors”, inflation-boosting cost-of-living policy.

National Accounts released on Wednesday showed green shoots in Australia’s private sector economic recovery, but quarterly government spending continued to increase by 0.8 per cent, and 2.6 per cent year-on-year.

Gross domestic product came in softer than expected with a quarterly growth of 0.4 per cent, below forecasts of 0.7 per cent, however private sector investment grew by 2.9 per cent.

Year-on-year Australia’s economy expanded by 2.1 per cent, the fastest growth in two years.

Facing a grilling at Senate estimates, Ms Bullock conceded excess deficits could result in higher interest rates.

“If there are less savings in the economy – and that includes by the government as well as private sector – and at the same time investment doesn’t come down, then that would put upward pressure on the neutral rate,” she said on Wednesday.

However she added there were also global inflationary pressures outside of Australia’s control.

RBA Governor Michele Bullock conceded increased government debt as a result of high spending would put ‘upward pressure’ on future cash rate decisions. Picture: Nikki Short

The RBA is widely expected to hold the cash rate at 3.6 per cent on Tuesday, with money markets lowering expectations of a rate hike by December 2027 from 85 per cent to 77 per cent following Wednesday’s softer GDP figures.

Judo Bank’s chief economic adviser Warren Hogan feared increased government spending would soon “become problematic”.

While he believed private sector spending would continue, it was now incumbent on the government to “pull back”.

“There is a situation that could happen next year where the government hasn’t pulled back enough, the private is picking up, demand is too strong, inflation continues to rise and they have to hike rates,” he said.

Treasurer Jim Chalmers will hand down the MYEFO budget update in a few weeks time. Picture: John Gass

Mr Hogan tipped two to three rate hikes of 25 basis points in 2026, which he warned would be “damaging for the economy, and … damaging for (Labor) politically”.

Zeroing in on the energy rebates, which slashes power bills by $75 a quarter at a cost of about $1.8bn every six months, AMP chief economist Shane Oliver said they were a “very expensive way to protect ourselves from the rising electricity prices”.

Mr Oliver, who is also critical of government spending was running at about 28 per cent of GDP, despite levels operating between 23 to 24 per cent of GDP pre-pandemic.

“We’ve got to bite the bullet sooner or later. I think it makes more sense to finish them and find other, better ways to bring electricity costs down”.

Judo Bank Chief Economic Advisor Warren Hogan was against an extension of the energy rebate. Picture: John Appleyard

He said they were “another form of government spending” which takes resources away from the private sector and adds to inflationary pressures.

Mr Hogan said rebates only created a “short term illusion of getting inflation and cost of living under control” and worsened inflation.

“It’s actually smoke and mirrors, it’s trickery … putting the money in the economy just adds to the inflation pressure by increasing demand,” he said.

Responding to National Accounts, the Treasurer said Australia’s economy was growing at the fastest pace in two years, with the private sector recovery leading the growth.

While he appeared to manage expectations of extending the energy rebates, and repeatedly started they were “not a permanent feature of our budget”.

He said the MYEFO would focus on moving “spending to higher priority areas,” like veterans affairs.

“We’re being upfront with people and saying those energy bill rebates, as we’ve said now for a couple of years, are not a permanent feature of the budget,” he said.

“People shouldn’t expect them to continue forever, and we’ll make a decision on them in the coming days.”

Shadow Treasurer Ted O’Brien said Australia’s economy was flatlining.

“That an economy this weak is generating rising inflation – set to remain above the RBA’s target for at least the next two years – speaks volumes about Labor’s ongoing failure to stop its spending spree and start growing the economic pie,” he said.

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