The Reserve Bank surprised most analysts and raised interest rates another notch last Tuesday. This creates the distinct impression that the Bank does not have confidence that the Treasurer and Government will do enough in the Federal Budget to help control inflation.
This is particularly the case as the March Quarter CPI reading showed inflation is already declining. Prices rose 6.0 per cent over the last year, down from 6.8 per cent in the year to December. Inflation for the Quarter was 1.4 per cent, or 5.6 per cent annualised. Yet interest rates went up again.
The Treasurer is keen to create the impression that it is solely the RBA’s job to control inflation, and it must take the full blame for the rising interest rates. Certainly the RBA raises the rates, but the Government is part of the reason inflation is high and rates must go up to control it.
The RBA’s previous extremely low interest rates helped fuel inflation by keeping borrowing costs low. High Government spending put more cash in people’s hands, which they spent, creating extra demand, and also adding to inflation.
Governments should spend more when the economy is slow and needs stimulus. They should cut back their spending when the economy is strong, everyone is in work and businesses are doing well, like now.
The previous Government spent too much on the Covid response. The initial support and stimulus was needed but it continued too long as the economy rebounded. Then there was an election to be won and handouts always help.
The new Government shows no sign of cutting its spending despite the strong economy. It appears to be cutting infrastructure spending which creates future economic growth, to boost welfare spending which adds to inflation and provides no long term benefit.
From 1980 to 2013 Australian Governments stuck to an average spending limit through good times and bad of 25 per cent of Australia’s total GDP or economic output. A quarter of our total income was collected in taxes by governments and spent by them.
This rose above 30 per cent in 2020, came down to 26 per cent last year but is now rising again according to the Australian Financial Review. As well as the Government taking a bigger slice of our income and interfering more in our lives it is also a major contributor to inflation.
The Federal Budget will come close to balance for this financial year. It won’t be due to cuts to Government spending though. It will be due to the huge increases in mineral prices last year. The Government will collect massive amounts of royalties, especially from iron ore and coal.