The Reserve Bank raised Australia’s cash rate to 4.6% on Tuesday, drawing angry responses from callers under financial pressure as Labor faces persistent inflation, rising unemployment and falling house prices ahead of the 2028 federal poll.
Household pressure and inflation
Talkback radio callers around the country called Reserve Bank governor Michele Bullock and the bank’s board “heartless” and “cruel” after Bullock warned that further rate increases could come soon. The decision adds to cost-of-living pressures, now a central political issue.
Reserve Bank research released in July found that only 25% of respondents could correctly explain that higher interest 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 the bank’s target band of 2% to 3%.
Unemployment also rose to a near five-year high. 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 inflation problems facing the government. Bullock said higher fuel prices and other disruption from the Middle East were “in addition” to domestic problems, including excess demand associated with government spending.
Spending, borrowing and public services
New South Wales premier Chris Minns distanced himself from Labor colleagues in Canberra. He said his state government had controlled spending, including by pursuing offsets to balance the cost of new programs.
Chalmers said real spending growth under Labor had averaged 2% a year. That figure included a sharp spending fall in 2022-2023, when the government wound back pandemic support packages. Excluding that year, real spending averaged 4.2% annual growth, 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 a summit organised by the Australian Public Policy Institute on Wednesday, Chalmers said Australia’s economic 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.
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.”
The mid-year budget update is due just before Christmas. Surging global interest rates are expected to add to borrowing costs for governments and companies, including cash-hungry AI developers, amid government deficits the article described as unsustainably high. The Australian Financial Review reported that Treasury forecasts interest payments will overtake Medicare spending by 2028-2029, due to $1.2tn in federal debt.
Election pressure and proposed cuts
Chalmers and finance minister Katy Gallagher will need to find more savings before the end of the year. Measures already taken, including capping some allied health benefits for veterans and reducing the private health insurance rebate for seniors, have proved politically painful.
The article said economic pressures could create an opportunity for Angus Taylor and the opposition. Taylor gave Labor no leeway for the international energy crisis’s contribution to Australian inflation, while the Coalition 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 of its vehicles for delivering new housing, “corporate welfare,” the NDIS and other welfare programs. He also proposed restricting first-home-buyer support to Australian citizens.
One Nation could also reflect voter anger, the article said, and looked set to win a slew of seats in Victoria’s state election in November and in New South Wales in March. It described Pauline Hanson’s policies as “gibberish” and said Taylor must persuade voters his plans would turn things around, while distinguishing the Coalition from Labor and One Nation.
Labor’s difficulties with inflation, high interest rates and cost-of-living pressures looked likely to grow, the article said, leaving household finances a major vulnerability ahead of the election.