S&P Global has warned that the Albanese government's continuing budget deficits leave the nation's finances exposed to a negative shock, such as a downturn in mining commodity revenues. The warning comes at a delicate moment: households are still absorbing the effects of a Reserve Bank of Australia (RBA) that has raised interest rates to tame inflation.
S&P sovereign rating analyst Martin Foo put the pressure point plainly. Outside the pandemic, federal spending is at its highest level in 40 years, working against the central bank's efforts, he said. Canberra and the RBA are pulling in different directions. Mortgage holders sit in the middle.
What's Driving the Spending
The deficits don't stem from one runaway program. S&P says record government spending on debt interest, disability and defence is driving them. Two of those three lines, interest on existing debt and defence, are costs the government carries whatever its social priorities. The third, disability, funds support for people who rely on it.
That mix matters when the debate turns to where the budget should tighten. Debt interest can't be negotiated away. Disability support serves some of the country's most vulnerable people. Any serious discussion of closing the gap has to reckon with what, and who, sits on the other side of the ledger.
The RBA Admits a Misjudgment
Ian Harper, a former RBA board member, acknowledged that the central bank was caught off guard by last year's resurgence in inflation. The bank had assumed the Australian economy could sustain more demand without generating price pressures, he said. That assumption proved wrong.
Harper also said the central bank could raise interest rates again before the end of the year. He added that the RBA was starting to give more weight to short-term inflation expectations in its cash rate decisions, a shift from its traditional approach.
For borrowers, that's an uncomfortable signal. The institution responsible for steering the economy has conceded it misread demand, and it's now changing how it makes rate decisions. Another increase would hit the same households that have already absorbed earlier ones.
A Policy Squeeze
The two warnings fit together awkwardly. S&P says high government spending works against the RBA's inflation fight. Harper says the RBA underestimated how much demand the economy could take. Both point to a coordination problem between fiscal and monetary policy: the central bank is leaning on interest rates to do work that budget settings aren't helping with.
S&P's concern about commodity revenues adds another layer. A downturn in mining income would hit a budget already running deficits, leaving less room to cushion the economy just when support might be needed.
Why This Matters:
When fiscal and monetary policy work against each other, ordinary households tend to carry the cost, mainly through higher interest rates on mortgages and other borrowing. S&P's warning shows how little cushion the budget would have if mining revenues fell, limiting the government's ability to protect jobs and services in a downturn. Harper's admission that the RBA misjudged demand, and may raise rates again before the end of the year, makes clear what's at stake in economic management. It also raises a fair question: how should Australia balance disability support, defence and debt servicing against the need for a budget with room to absorb shocks, and how should it share that burden?