PM’s denial as big spending fuels prices, interest rates

The fact that Anthony Albanese appears to be in denial about the Reserve Bank’s warnings about the inflationary dangers – and therefore the risks of prolonged elevated interest rates – caused by heavy state and federal government spending augurs badly for the nation’s economic future and workers’ living standards. It is a depressing point in the nation’s economic story. On Thursday, the Prime Minister, who came into office promising to be a straight-shooter, denied the RBA had attributed a worse outlook for underlying inflation to government spending. “That’s not what they’ve said,” Mr Albanese told Sky News. But on Tuesday, in its Statement on Monetary Policy about why inflation remains above target and is proving persistent, the central bank was clear: “Public demand is forecast to be stronger than previously expected, reflecting recent public spending announcements by federal and state and territory governments.” On Wednesday, Jim Chalmers disputed that his May budget contributed to persistent prices growth. But, unlike his boss, the Treasurer did not deny what the bank was saying.

On Thursday, at a speech at the Rotary Club of Armidale, where she grew up, RBA governor Michele Bullock said the bank “will not hesitate” to lift interest rates again if needed to stop inflation from becoming “persistently high”. She reinforced the hawkish message of the RBA’s monetary policy board after it pushed back its forecast on when underlying inflation would fall to the 2-3 per cent target range by six months, to the end of next year. Inflation would likely reach the midpoint of that range in 2026, the board forecast. Its report said this was partly because of a “stronger outlook for domestic demand, led by public demand”.

Credible economists, rightly, are aghast at Mr Albanese’s denial. Judo Bank chief economic adviser Warren Hogan said he was “not sure how it was not clear” government spending had impacted the RBA’s inflation forecasts. Government spending was injecting demand that “is not going to result in more things being produced, it is going to result in prices going up”, Mr Hogan said. George Washington University assistant professor Steven Hamilton said no credible economist could argue the government was assisting the RBA in reducing inflation. “The RBA is notoriously reticent to even come close to criticising the government,” he said. “The fact they decided to point to high public demand in explaining sticky inflation is the central bank equivalent of screaming from the rooftops what the causes of the problem are.” Mr Albanese’s denial further widens the government’s divide with the RBA. As AMP chief economist Shane Oliver said, the RBA, contrary to what Mr Albanese claims, has “actually said public demand is a factor slowing the return of inflation to target”.

Mr Albanese’s blatant denial about the bank’s warning came, ironically, as he used the government’s new cash splash – a taxpayer-funded pay rise for childcare workers – for fetching photo opportunities. The 15 per cent rise for 200,000 childcare workers will pump $3.6bn into the economy in time for the next election. The staff will enjoy another $103 in their weekly pay packets in time for Christmas, and another $50 a week next year. The rises will be paid on top of any award increases negotiated through enterprise agreements. Most of the workers who will benefit from this taxpayer-funded splurge are not on the public payroll.

As we said in 2022, when Labor promised hefty above-inflation pay rises for aged-care staff, such actions set precedents, prompting other groups of workers in the private or not-for-profit sectors to seek government largesse. But big spending, by federal and state governments, which are dangerously profligate, has consequences, even if Mr Albanese prefers to be in denial about them. Stubborn inflation, elevated interest rates, higher rents and living costs tend to follow.