Talkback callers called Reserve Bank governor Michele Bullock and the bank’s board “heartless” and “cruel” after Tuesday’s decision to raise the cash rate to 4.6%. The callers faced financial pressure, and Bullock warned that more increases could come soon. For households already angry about the cost of living, the central bank’s lever means another bill from above.
Who Sets the Price
Australia’s economy is shaping up as a central issue through to the 2028 federal poll. Persistent inflation, interest rates at a 15-year high and voter anger have put household budgets at the centre of the political contest. People carrying those costs don’t set the cash rate, but the Reserve Bank’s decision reaches straight into their finances.
Research the Reserve Bank released in July found a wide gap between the institution’s intended effect and public understanding of interest rates. Only 25% of respondents could correctly explain that higher rates would ultimately lead to lower inflation. More than half believed higher rates would push up costs in the economy—the opposite of the central bank’s intended effect.
Headline inflation reached 4% in the year to August, up from 3.5%. The Reserve Bank’s preferred measure, trimmed mean inflation, stayed at 3.6% for a third month, above its target band of 2% to 3%. The figures came as unemployment rose to a near five-year high and house prices fell for a sixth consecutive month, following changes that made negative gearing and capital gains tax less generous.
Anthony Albanese and Jim Chalmers blamed Donald Trump’s war in Iran and the resulting global fuel shock for the government’s inflation problems. Bullock also pointed to excess demand associated with government spending, saying fuel prices and other disruption from the Middle East came “in addition” to domestic problems. The explanations differ. The public faces the same pressure.
Budgets, Cuts and the Bill
New South Wales premier Chris Minns distanced himself from Labor colleagues in Canberra, saying his state government had controlled spending, including by pursuing offsets to balance the cost of new programs. Chalmers said real spending growth averaged 2% a year under Labor. A sharp spending fall in 2022-2023, as pandemic support packages were wound back, lowered that figure. Excluding that year, real spending grew by an average of 4.2% a year, compared with 2.6% under the Coalition in the six years before the pandemic. The statement on the final budget outcome for 2025-2026 reported those figures.
At an Australian Public Policy Institute summit on Wednesday, Chalmers said the challenges were “not exclusively global, but right now they are primarily global”. Apart from major cuts to the National Disability Insurance Scheme, Labor may have few options to reduce spending while pursuing plans for health, education, social programs and defence. The government could also add universal childcare if it wins a third term in 18 months’ time. That proposal depends on a future election result; the article describes no community-led alternative or mutual-aid response.
Chalmers said he was putting all available effort into improving sluggish productivity. Bullock said productivity was “doing nothing” to help the country’s problems. Budget watcher Chris Richardson called the economy “completely clapped out” and warned that “every time we get five minutes of economic sunshine, the inflation dragon rears its head again.” Productivity growth is notoriously hard to shift, the article notes. Labor has set itself that test.
The Election Comes After the Squeeze
The mid-year budget update is due just before Christmas. Surging global interest rates are expected to add to budget challenges as borrowing costs rise for governments and companies, including cash-hungry AI developers, amid government deficits the article describes as unsustainably high. The Australian Financial Review reported that Treasury forecasts interest payments will overtake Medicare spending by 2028-2029, with federal debt at $1.2tn.
Chalmers and finance minister Katy Gallagher will need to find more savings before the end of the year. Modest measures have already proved politically painful: capping some allied health benefits for veterans and reducing the private health insurance rebate for seniors.
Angus Taylor and the opposition could benefit from Labor’s difficulty, but the Liberal leader hasn’t given Labor leeway over the international energy crisis’s contribution to Australian inflation. The Coalition also needs to regain voters’ confidence as a better manager of the economy. Asked where he would cut spending to ease inflationary pressure, Taylor named Labor’s net zero by 2050 programs, some vehicles for delivering new housing, “corporate welfare,” the NDIS and other welfare programs, and first-home-buyer support, which he would restrict to Australian citizens.
One Nation could reflect voter anger. The article says it looked set to win a slew of seats in Victoria’s state election in November and in New South Wales in March. The parties are positioning themselves for votes while inflation, high interest rates and cost-of-living pressures bear down. Hip-pocket politics is now a major vulnerability ahead of the election.