Public spending must be limited

The Reserve Bank of Australia has signalled that the future for more interest rate cuts is uncertain. What is certain is that inflationary increases in government spending make the bank’s job of reducing inflation harder. According to a new paper for the Liberal Party-associated Menzies Research Centre, all-government spending is more than $1 trillion and the increased public outlays on wages, services and goods will add 1.5 per cent to inflation by June 2026. Without the expenditure, the centre suggests, inflation would have been below the bank’s preferred ceiling in December.

It is an unavoidable lesson for both Labor and the Coalition as they plan campaigns for the imminent federal election. The more ill-disciplined spending they propose, the higher interest rates will be for longer.

Not all increases in government outlays add to inflation; infrastructure investment can increase productivity. But such spending has to be properly planned and well managed, and have clear economic benefits, lest it add to the debt pile. That does not appear to be the case in Victoria, where the Victorian Auditor-General’s Office reports the cost of major state government projects increased by 8 per cent – an eye-watering $11.6bn – in 2022-23. But as to why, public sector agencies are not keen to explain. According to VAGO, information provided to parliament is “not meaningful” and “does not allow the community to understand major projects’ performance against expected cost, time, scope and benefits or the impact of any changes”.

Such lack of accountability is not acceptable. As the Menzies Research Centre makes clear, government spending is not a solution to inflation – it is a big part of the problem. And it will be cold comfort for Anthony Albanese. The Prime Minister has helped out the Labor administration of a state with must-win seats in the imminent election by kicking in $2.2bn of federal funds into the Melbourne Suburban Rail Loop, the economics of which are widely questioned.

Whatever explanation Mr Albanese offers will not be helped by Victorian Transport Minister Gabrielle Williams, who is metaphorically shooting the accountant, disputing VAGO’s figures. Such reticence appears to be standard operating procedure for Premier Jacinta Allan’s government; she is saying as little as possible about first backing, then farewelling newly former police chief commissioner Shane Patton.

For Victorians with long memories this will be all too familiar, reminiscent of the disorganised end days of the Cain-Kirner Labor governments that used unsustainable public spending as cover for incompetence a generation ago, as if their government acted outside the economy. But the idea continues and not just in Victoria. On Wednesday Jim Chalmers called on landlords to take the RBA cutting interest rates from 4.35 per cent to 4.1 per cent “into consideration” in setting rents. As if rental property is mortgage free. As if owners are not slugged by inflation. As if a fractional reduction in rates will compensate for the cumulative impact of inflation on the federal Treasurer’s watch.