RBA Carries the Load as Budget Cuts Threaten Downturn

The Reserve Bank of Australia is doing much of the work to manage the economic cycle, while a sharp cut in government spending next month could deepen a downturn already under way, an ABC analysis said. Households and workers face the consequences as interest rates and budget policy become the battleground over who should bear the cost of a cooling economy.

Who Holds the Economic Levers

Jacob Greber, political editor of ABC's 7.30 program, wrote that repairing the budget without damaging the economy takes persistence and time. Commentators have urged the government to use next month's mid-year economic update, or MYEFO, to cut spending and reduce domestic demand. But the analysis warned that spending cuts could be the right prescription at the wrong time if the Reserve Bank's outlook proves correct.

After the rate decision, Reserve Bank governor Michele Bullock said: "I want to be very clear that we are not tightening monetary policy because of the direct impact of oil prices on inflation. I know there is confusion in the community, so I want to be very clear. Monetary policy cannot impact global oil prices. Rather, the tightening in monetary policy is to address domestic capacity pressures."

That distinction matters. The opposition has partly blamed government spending for Tuesday's rate rise, though evidence for the link remains contested. Government spending has risen from less than 25 per cent of gross domestic product before the pandemic to more than 26 per cent. Former Reserve Bank board member Warwick McKibbin told 7.30 this week that higher spending isn't a problem when inflation and interest rates are low. When inflation takes hold in a hot economy, he said, there is less room to absorb shocks, such as a demand-side boom in AI investment or a supply-side hit to crude oil prices.

Who Pays When the Economy Cools

The Reserve Bank's statements forecast a collapse in business investment in the second half of 2027. After five interest-rate increases in 10 months, the current investment surge may be short-lived, the ABC analysis said. The property market has fallen further than Treasury anticipated in the May budget, while a strike in the home-construction industry is widening and serious cracks are appearing in the private credit market, where non-bank investors have lent money to builders.

Banks, supermarkets and technology companies including Canva are laying off workers. Rate rises wouldn't have helped David Jones, the analysis said, while noting that many factors may explain its difficulties. For people already under cost-of-living pressure, further cooling comes alongside choices made by central institutions: the Reserve Bank adjusts monetary policy, and the government weighs whether to withdraw spending.

The analysis also pointed to pressures tied to recent and longer-term policy choices. Advocates of more aggressive cuts to avoid "crowding out" the private sector might have preferred reductions in 2023 or 2024, when the effects would now show in the data and governments would be less "responsible" for inflation. A "fiscal retrenchment" has already taken place over the past two or three quarters, it said: government spending slowed, and the deficit showed signs of narrowing faster than anticipated in the May budget.

The Ballot Box and the Budget Fight

Labor won re-election in a landslide last year on a platform to expand government. The opposition largely matched that platform with election promises on Medicare bulk billing and defence spending. Critics say the May budget gave the government a chance to change course, but it failed to do so. Voters endorsed the current fiscal settings, the analysis said, but the election hasn't settled the argument over who should manage inflation—or the power of budget and monetary decisions to shape people's economic lives.

The analysis drew a political lesson from U.S. midterm results: voters angry about inflation can turn against incumbents. Donald Trump regained the presidency less than two years earlier on resentment about Joe Biden, but 24 months later the political wave had swung back, damaging MAGA's position across Congress and a number of governorships. The analysis called the U.S. midterms a possible historical outlier because of their extreme results, and compared them with Australia's 2025 federal election. The Albanese government faced little room for error amid cost-of-living pressures; government members appeared "punch drunk" after the year's fifth interest-rate increase, while criticism and media coverage were widely negative.

The analysis said Trump's tariffs, trade wars and actual war had damaged living standards for MAGA constituents and made life more expensive for others. In Australia, the Reserve Bank is managing the economic cycle more heavily than governments, perhaps because fiscal and monetary policy have been less aligned. If the economy cools as much as the Reserve Bank predicts, government action could help keep the lights on. But a sharp cut in next month's update, the analysis warned, could deepen a downturn already happening.