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Government spends too much. Interest rates go up. How do we stop it? · The Front

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  Speaker 1: From the Australian. Here's what's on the front. I'm Claire Harvey.
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  Speaker 1: It's Tuesday, February three, twenty twenty six. Federal parliaments back
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  Speaker 1: today and everything's all shook up, with the crumpled coalition
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  Speaker 1: scrambling to reorganize their seating arrangements and Susan Lee bracing
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  Speaker 1: for a looming.
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  Speaker 2: Assault on her leadership.
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  Speaker 1: We'll be following every development live at the Australian dot
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  Speaker 1: com dot au. The Reserve Bank meets today and is
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  Speaker 1: likely to push up the cash rate. That's because inflation,
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  Speaker 1: fueled by government spending, is on the way back up.
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  Speaker 1: Through the past year, Treasurer Jim Chalmers and Bank Governor
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  Speaker 1: Michelle Bullock were optimistic that the economy was improving. So
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  Speaker 1: how did they get it wrong? And who's to blame
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  Speaker 1: for the rise that will cost average mortgage holders thousands
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  Speaker 1: of dollars? That's today's story. Treasurer Jim Chalmers says it
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  Speaker 1: all the time. The independent Reserve Bank.
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  Speaker 3: The Reserve Bank has taken its decisions independently. Cut rates
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  Speaker 3: are ready. I don't second guess decisions taken independently by
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  Speaker 3: the Bank or it's board. I don't know that they've made.
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  Speaker 3: I cherished the independence of the Reserve Bank and tain
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  Speaker 3: the report are about bolstering the independence of the Reserve Bank,
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  Speaker 3: not undermining that independence.
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  Speaker 1: But is the central bank responsible for setting the cash
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  Speaker 1: rate that determines how much it costs banks to obtain
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  Speaker 1: money and therefore how much they charge us all in
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  Speaker 1: interest rates? Really independent?
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  Speaker 3: Jim Charmers says higher interest rates are smashing the economy.
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  Speaker 3: Global economic uncertainty and higher interest rates are smashing household
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  Speaker 3: budgets and slowing our economy.
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  Speaker 2: Dr Chalmers is blaming the economic outlook on the RBA's
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  Speaker 2: rate hikes.
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  Speaker 1: When Jim Chalmers became Treasurer with the election of the
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  Speaker 1: Albanzi government in May twenty twenty two, the cash rate
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  Speaker 1: was zero point three five percent and the standard variable
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  Speaker 1: rate for home loans was four point seven seven percent.
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  Speaker 1: Then it went up and up twelve consecutive rises until
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  Speaker 1: February twenty twenty five, then three cuts and a whole
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  Speaker 1: lot of holding steady through the past year. Chalmers has
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  Speaker 1: been quick to bask in the glory when the bank
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  Speaker 1: cuts rates.
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  Speaker 2: Thanks for your time, Gi, you must have been happy
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  Speaker 2: when you got that news.
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  Speaker 3: I was a pretty welcome decision by the Reserve Bank
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  Speaker 3: because it means more money in the pockets of millions
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  Speaker 3: of Australians who are still under pressure. It also means.
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  Speaker 1: Even when the bank has held rates steady, like in
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  Speaker 1: July twenty twenty five, the Treasurer has talked about it
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  Speaker 1: as part of an overall downward trend.
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  Speaker 3: But it is clear now the direction of travel on
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  Speaker 3: inflation and on interest rates has been established.
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  Speaker 1: And now he's insistent that b learning inflation isn't the
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  Speaker 1: government's fault, that is ultra higher public spending isn't what's
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  Speaker 1: causing the independent Reserve Bank to keep rates high or
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  Speaker 1: push them up.
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  Speaker 3: The Reserve Bank Governor has said on a number of
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  Speaker 3: occasions now our budget is better than a lot of
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  Speaker 3: other countries, and that a change in fiscal policy wouldn't
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  Speaker 3: necessarily warrant a change in their approach to monetary policy.
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  Speaker 3: And so I know that there'll be a lot of
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  Speaker 3: political commentary about last week.
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  Speaker 1: Inflation numbers came in higher than the government wanted, up
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  Speaker 1: point four of a percentage point to three point eight percent,
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  Speaker 1: and well above the Reserve Bank's target range. Matthew Cranston
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  Speaker 1: is the Australian's Economics editor Matt The Reserve Bank is
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  Speaker 1: widely tipped to put rates up when it meets on Tuesday.
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  Speaker 1: If it does, who can we.
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  Speaker 2: Blame, Claire? I think you can blame both the RBA
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  Speaker 2: and governments and why because governments have been spending an
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  Speaker 2: enormous amount and that has been driving up inflation. But
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  Speaker 2: also you've got to blame the RBA too, because the
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  Speaker 2: RBA has missed on a lot of its forecasts, whether
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  Speaker 2: it's where it thinks GDP is going to go, or
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  Speaker 2: where it thinks inflation's going to go, or unemployment for
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  Speaker 2: that matter. So I think both have responsibility in where
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  Speaker 2: inflation's gone because that's what's causing interstrates to go back up.
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  Speaker 2: Who's to blame for inflation is the question, really, Claire,
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  Speaker 2: And both the government and the RBA are responsible in
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  Speaker 2: some ways for that. The RBA delivered three interstraight cuts
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  Speaker 2: last year, which is very stimulatory to an economy, and
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  Speaker 2: the government has been spending, at least the federal government
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  Speaker 2: as well has been spending at a record amount, and
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  Speaker 2: states governments as well have been spending in a lot
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  Speaker 2: and that just drives inflation, and that's probably why we're
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  Speaker 2: going to see a rate hike on Tuesday.
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  Speaker 1: Yeah, there's two kinds of public spending. Government outlays on
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  Speaker 1: pensions and welfare and public sector wages, and then there's
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  Speaker 1: what they call public investment, which is spending on infrastructure projects,
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  Speaker 1: big roads, big rail projects. Both of those are at
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  Speaker 1: record highs at the moment. But the government has an
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  Speaker 1: argument to defend both of those things, that it's not
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  Speaker 1: got welfare out of control, and that those infrastructure projects
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  Speaker 1: are part of the great growth in productivity that we're
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  Speaker 1: all going to have. What's your take on both of
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  Speaker 1: those things.
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  Speaker 2: Well, the Treasurer keeps saying that government spending is not
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  Speaker 2: contributing to the overall increase in GDP growth. That's not right.
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  Speaker 2: You can just go on to the ABS and look
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  Speaker 2: at the September quarter and you can see that public
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  Speaker 2: demand did contribute, and it contributed both in expenditure. So
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  Speaker 2: that's the things like you mentioned before, where you're just
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  Speaker 2: spending to keep people employed or you're spending to buy materials,
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  Speaker 2: and the other side, which is this investment. So it
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  Speaker 2: keeps on pumping out money as well, especially in these
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  Speaker 2: things called off balance sheet items. So for example, last
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  Speaker 2: year they went and put money into all sorts of investments.
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  Speaker 2: That's doing two things, as you say, the capital investment
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  Speaker 2: and the spending, and that is contributing overall. And what
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  Speaker 2: else does that do. It has the potential to do
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  Speaker 2: what it's called crowding out and that means that the
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  Speaker 2: private sector goes, oh, well, the government's beating us on
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  Speaker 2: this contract or in terms of buying the things that
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  Speaker 2: are needed for it, competing with resources and labor and materials,
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  Speaker 2: and then the private sector doesn't grow as much as
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  Speaker 2: it could. So private sector is still growing, but it's
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  Speaker 2: not growing as much as it could. And it also
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  Speaker 2: means that there's capacity constraints in the economy too. So
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  Speaker 2: that's the answer is that, well people say it's not,
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  Speaker 2: it is and you can see that just with the
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  Speaker 2: last September quarter of data.
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  Speaker 1: Jim Chalmers would say that on those big spending priorities,
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  Speaker 1: you know, let's say the NDI is that the government
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  Speaker 1: is trying to get spending under control, and that for
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  Speaker 1: other priorities, let's say the Orcus nuclear submarine project, that
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  Speaker 1: that's something that Australia just has to do. Where are
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  Speaker 1: the most obvious areas that public spending is out of
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  Speaker 1: control or is too high, or they haven't shown the
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  Speaker 1: restraint that they've needed.
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  Speaker 2: Well and diis they said only in the media budget
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  Speaker 2: update in December was growing at ten percent and their
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  Speaker 2: target was more like six percent. So Indy Ice is
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  Speaker 2: one area that I think you wouldn't have too much
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  Speaker 2: trouble trying to find some excessive spending on trying to
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  Speaker 2: get what you need out of that service. Public sector
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  Speaker 2: wages are pretty big. They fall through public sector wages.
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  Speaker 2: That's an area where I think the bill has now
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  Speaker 2: reached a record for public servants, the wage increases they get.
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  Speaker 2: I think overall, though, there's this idea that the spending
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  Speaker 2: doesn't contribute to inflation because it might not be as
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  Speaker 2: big as it has been in the past, and that's
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  Speaker 2: sort of true. The rate of growth in government spending
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  Speaker 2: is sort of coming back down again. But I actually
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  Speaker 2: just don't believe that they are going to show as
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  Speaker 2: much fiscal restraint as they say they have. I think
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  Speaker 2: a huge amount of the spending is actually discretionary. When
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  Speaker 2: the Treasurer says that this spending is in what he said,
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  Speaker 2: any reasonable person would call this necessary or essential spending.
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  Speaker 2: And I think this is a really important point, Claire,
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  Speaker 2: because it shows if you read the retoric of the
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  Speaker 2: Treasurer on this point, it shows you that if they
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  Speaker 2: think this is essential spending, then they're going to continue
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  Speaker 2: that spending. And I think they actually believe that all
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  Speaker 2: this spending is warranted.
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  Speaker 1: For Jim Chalmers and Anthony Albanezi, I think the greatest
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  Speaker 1: fear is spiraling unemployment. Michelle Bullok has had a similar
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  Speaker 1: tune the governor of the Reserve Bank. She said that
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  Speaker 1: her goal has been to avoid high unemployment.
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  Speaker 4: The board strategy, as you know, has been to bring
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  Speaker 4: inflation down while avoiding a sharp rise in unemployment. Because
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  Speaker 4: we didn't take rates as high as some other countries,
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  Speaker 4: it may be that we don't need to reduce rates
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  Speaker 4: as much either.
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  Speaker 1: Has she not been quick enough to push rates up?
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  Speaker 1: And some of her critics would say that if that's
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  Speaker 1: the case, that she is under political pressure from the
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  Speaker 1: government or she's buckling to that pressure.
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  Speaker 2: What do you think? Okay, So just there's two parts
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  Speaker 2: that question. The first is around the employment. Really interesting
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  Speaker 2: to know that a lot of the new employment and
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  Speaker 2: what's got us down to this really low employment rate.
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  Speaker 2: A lot of it has been public sector jobs. So
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  Speaker 2: how do you get the public sector jobs through spending?
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  Speaker 2: How do you do the spending through borrowing? And what
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  Speaker 2: happens when global cost of debt goes up That means
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  Speaker 2: younger people have to flip the interest bill in decades
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  Speaker 2: to come. There's that first part of the question. Second is, yeah, well, look,
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  Speaker 2: I've been in the US for four years and I
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  Speaker 2: came back a year ago listening to the change in
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  Speaker 2: the retric from the RBA governor and the relationship between
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  Speaker 2: the treasure Jim Charmers, and I measured that against when
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  Speaker 2: I was away. There was quite a lot of tension
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  Speaker 2: around what Michelle Bullock was saying needed to happen, and
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  Speaker 2: there was a little bit of rgie bargie, to say
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  Speaker 2: the least, between Charmers and Bullock, and I think that
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  Speaker 2: set a tone. And I interviewed Michelle Bullock in December
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  Speaker 2: and I said to her, are you actually saying what
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  Speaker 2: you need to say to inform the public about how
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  Speaker 2: important the fiscal impulse is, the government spending is when
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  Speaker 2: it comes to making your decision about where interest rates
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  Speaker 2: should go. And she said, we had to do better.
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  Speaker 2: So she's saying that the RBA has to do better
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  Speaker 2: in explaining to the public the importance of government spending
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  Speaker 2: and so forth. So I think maybe she's gone through
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  Speaker 2: a lull of pushing back on charmers and you know
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  Speaker 2: where rates should be and so forth, because obviously Chalmers
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  Speaker 2: would love to see further interest rate cuts to keep
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  Speaker 2: on fueling the economy, but she's now having to go, well,
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  Speaker 2: we have to lift to make sure that inflation doesn't
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  Speaker 2: get away from us. And I think maybe that easing
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  Speaker 2: in the language is starting to just ever so slightly
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  Speaker 2: maybe come back. And even though government spending growth is
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  Speaker 2: slightly less than the growth it was before, and it's
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  Speaker 2: sort of coming to a point where she might be
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  Speaker 2: a little bit more comfortable, I still think she's going
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  Speaker 2: to give some slight nudges about all governments, not just
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  Speaker 2: the FEDS, but the states as well, in making sure
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  Speaker 2: that the government spending is in control and doesn't contribute
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  Speaker 2: to inflation which would force them to make even more
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  Speaker 2: than one or two interestrate hikes.
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  Speaker 1: Coming up. Housing is a big part of huge daily expenses,
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  Speaker 1: so how we'll pushing up mortgages make anything better? That's
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  Speaker 1: after the break. Finally, Matt, let's just talk about housing.
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  Speaker 1: One of the mind bending parts of this inflation jigsaw
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  Speaker 1: puzzle is that one of the big contributors to inflation
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  Speaker 1: in January was housing. The cost of housing, and everyone
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  Speaker 1: who's got a mortgage or is paying rent knows that
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  Speaker 1: it is cripplingly high. A rise in the cash rate
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  Speaker 1: will mean mortgage rates go up and housing becomes even
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  Speaker 1: more expensive. So how do we get out of this spiral?
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  Speaker 2: I know it sounds silly, but it's a very simple answer.
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  Speaker 2: But it's just politically not workable, and that is you
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  Speaker 2: have to boost supply side. Politicians fall in love with
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  Speaker 2: demand side because it always looks as though they're giving
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  Speaker 2: money to people and they're helping people, whereas supply side,
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  Speaker 2: what you're doing is you're helping produce, and there are
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  Speaker 2: fewer producers than there are consumers. Right, so you might
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  Speaker 2: just have one property developer who sells to one hundred consumers. Right,
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  Speaker 2: So it doesn't have the same political power as helping
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  Speaker 2: the demand side. But the solution is the supply side
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  Speaker 2: got to release more land, got to cut the regulations.
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  Speaker 2: It's all the stuff that isn't that sexy and that
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  Speaker 2: doesn't get big headlines and so forth, but it's the
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  Speaker 2: stuff that actually helps increase supply so that you're not
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  Speaker 2: really damaging house prices because we all want our homes
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  Speaker 2: to be worth more and to not affect our wealth,
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  Speaker 2: but also we want more homes so that people can
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  Speaker 2: actually get started and move in. I mean, there really
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  Speaker 2: is no other response way because everything else is demand,
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  Speaker 2: and you're just throwing more money, which allows more people
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  Speaker 2: to compete and bid each other up, and it makes
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  Speaker 2: it harder to get in it's supply side, and until
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  Speaker 2: the politicians brave enough to go down that avenue. I mean,
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  Speaker 2: there are some things. Peter Chulick, the former RBA economists
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  Speaker 2: now working at the Center for Independent Studies, He was
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  Speaker 2: saying that what you should do is sort of ramp
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  Speaker 2: up reward payments to the states who can make sure
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  Speaker 2: that they are boosting supply side through measures such as
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  Speaker 2: expediating approvals and so forth. So that's sort of interesting.
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  Speaker 2: The government does have a mechanism to do that, where
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  Speaker 2: they give more money to the states who meet their
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  Speaker 2: goals in delivering housing supply.
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  Speaker 1: Matthew Cranston, thank you very much.
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  Speaker 2: Thanks Claire, you can read.
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  Speaker 1: Maths journalism and follow our live reporting and analysis of
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  Speaker 1: the Reserve Bank decision and all the fallout live at
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  Speaker 1: the Australian dot com dot au