Reserve Bank governor Michele Bullock raised the cash rate to 4.6% on Tuesday and warned that further increases could come soon. Rates now stand at a 15-year high. Talkback callers across the country didn’t hold back, calling Bullock and the bank’s board “heartless” and “cruel.”
The economy almost always dominates Australian federal elections. The past week suggests it will remain central through to the 2028 poll, with the Albanese government facing persistent inflation and voter anger over the cost of living.
The Numbers Behind the Anger
Headline inflation hit 4% in the year to August, up from 3.5%. Trimmed mean inflation, the Reserve Bank’s preferred measure, stayed at 3.6% for a third month. That’s well above the bank’s target band of 2% to 3%.
Other indicators offer little comfort. Unemployment has climbed to a near five-year high. House prices have dropped for a sixth consecutive month, following changes that made negative gearing and capital gains tax less generous.
Public understanding of the central bank’s tools remains thin. Reserve Bank research released in July found that only 25% of respondents could correctly explain that higher rates would ultimately bring inflation down. More than half thought higher rates would push up costs across the economy—the opposite of their intended effect.
Who Owns the Inflation Problem?
Prime Minister Anthony Albanese and Treasurer Jim Chalmers pointed offshore, blaming Donald Trump’s war in Iran and the resulting global fuel shock. At a summit organised by the Australian Public Policy Institute on Wednesday, Chalmers said Australia’s challenges were “not exclusively global, but right now they are primarily global.”
Bullock also blamed domestic pressures. She pointed to excess demand associated with government spending, saying fuel prices and other disruption from the Middle East came “in addition” to domestic problems. She said productivity was “doing nothing” to help.
New South Wales premier Chris Minns, a Labor colleague, distanced himself from Canberra. He said his state government had kept spending under control, including by pursuing offsets to balance the cost of new programs.
Chalmers answered with figures from the final budget outcome for 2025-2026. Real spending growth, he said, averaged 2% a year under Labor. A sharp fall in spending in 2022-2023, as pandemic support packages were wound back, pulled that figure down. Excluding that year, real spending rose by an average of 4.2% a year, compared with 2.6% under the Coalition in the six years before the pandemic.
Budget watcher Chris Richardson was blunt. He 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.”
A Tightening Fiscal Squeeze
The mid-year budget update is due just before Christmas. Surging global interest rates are expected to add to the strain, lifting borrowing costs for governments and companies, including cash-hungry AI developers, amid unsustainably high government deficits. The Australian Financial Review reported that Treasury forecasts interest payments will pass Medicare spending by 2028-2029, driven by $1.2tn in federal debt.
Chalmers and finance minister Katy Gallagher need to find further savings before the end of the year. Aside from major cuts to the National Disability Insurance Scheme, Labor may have few options as it pursues plans for health, education, social programs and defence. Universal childcare could join the agenda if the party wins a third term in 18 months’ time. Modest savings have already proved politically painful, including capping some allied health benefits for veterans and reducing the private health insurance rebate for seniors.
The Opposition’s Opening
Liberal leader Angus Taylor gave Labor no leeway over the energy crisis’s contribution to inflation. The Coalition needs to win back voters’ confidence as the better economic manager.
Asked where he’d cut spending to ease inflationary pressure, Taylor named Labor’s net zero by 2050 programs, some of its vehicles for delivering new housing, “corporate welfare,” spending on the NDIS and other welfare programs, and first-home-buyer support for non-citizens.
There’s another threat. One Nation looks set to win a slew of seats in Victoria’s state election in November and in New South Wales in March. The party’s policies under Pauline Hanson were described as “gibberish.” Taylor must persuade voters his plans would turn things around and distinguish the Coalition from both Labor and One Nation.
Why This Matters: Borrowing costs are climbing while federal debt stands at $1.2tn, and Treasury’s forecast that interest payments will overtake Medicare spending by 2028-2029 shows how quickly debt service can crowd out other priorities. The central bank’s own governor has pointed to government spending as a source of excess demand, complicating the argument that overseas events are the main cause. From a fiscal-responsibility perspective, pressure to find savings before the mid-year update is real, and so is the political price. Households facing higher rates and a 4% headline inflation rate will judge the government on results, not explanations. Spending restraint and productivity will be central tests heading into 2028.