This week we saw the independent Reserve Bank raise interest rates by 25 basis points to 3.35 per cent. It continued the cycle of increases that began before the election, following the highest quarter for inflation in 2022 – the March quarter. The strong expectation of the market was for another increase and homeowners were expecting it as well. But knowing it’s coming doesn’t make it any easier to handle for millions of Australians already feeling the pinch.
Rising interest rates are a consequence of the inflation challenge that is weighing heavily on our economy – as pressures that come at us from around the world are felt around the kitchen table.
The job for the independent Reserve Bank is to get on top of this inflation without crunching the economy. Central banks around the world face the same conundrum.
This inflation challenge is the defining feature of our economy in 2023, just as it was in 2022 – and that means addressing inflation is the primary focus of the Albanese government.
Our plan to address inflation has three parts to it – responsible cost‑of‑living relief, dealing with supply chain issues and keeping spending under control.
The October budget funded cheaper childcare and cheaper medicines, and the May budget will include direct energy bill relief for households and businesses struggling with higher power prices.
These measures are targeted and affordable, taking some of the pressure off household budgets without putting more pressure on inflation.
The supply chain problems our government inherited have sent prices higher and made us more vulnerable to international shocks. That’s why we’re investing in cheaper and cleaner forms of renewable energy and firming up the energy grid. That’s why we’re getting more people into apprenticeships and vocational training, as well as responsibly increasing our skilled migration intake.
It’s why we’re making the National Broadband Network better, and it’s why we’re establishing the National Reconstruction Fund.
The third part of our plan is just as important – delivering a responsible budget with spending restraint as its hallmark. On this measure, we’ve made substantial progress already. The October budget banked 99 per cent of the revenue windfalls over the next two years – when inflation is at its highest – so that we weren’t contributing further to inflation in the economy. This stands in stark contrast to the previous Coalition government’s record of returning just 40 per cent of revenue upgrades to the bottom line.
Payments will fall in real terms over the next two years, and real spending growth will average just 0.3 per cent a year across the next four years. This is real spending growth at a rate nearly 10 times slower than the previous government’s pre‑pandemic average of 2.6 per cent a year.
We found $22 billion in new savings in our first budget, after our predecessors couldn’t find a cent of new expenditure savings in their last budget. While the impact of our new policy decisions came in under $10 billion – with most spending for unavoidable measures left unfunded by the previous government – the former government’s final budget had a $30 billion impact through new policy decisions.
No matter which way the numbers are cut, our first budget did some heavy lifting to take pressure off inflation, and we’ll continue that approach in our second in May. This is being noticed by the ratings agencies and international organisations that have backed in our plan.
Last week, the International Monetary Fund credited our spending restraint with helping to “support monetary policy in holding back excess demand”. And it said the October budget helped to “address structural economic issues by alleviating labour and skills shortages, promoting productivity growth, and facilitating the climate transition”.
Several ratings agencies have reaffirmed Australia’s AAA credit rating in the months after the budget.
Standard & Poor’s pointed to the government’s expenditure restraint in its decision, Fitch highlighted the budget’s broadly neutral fiscal stance to avoid exacerbating inflation, and Morningstar endorsed the banking of revenue windfalls, the targeted nature of our cost‑of‑living relief and our savings decisions.
Inflation is still unacceptably high, and it will stay higher than we want it to for longer than we want it to. But there is growing evidence that inflation is now around its peak and will begin to moderate in 2023. Plenty of the factors influencing inflation and interest rates are outside the government’s control – like the war in Ukraine, the volatility in global supply chains, and the independent decisions of the central bank.
It’s our job to use the levers we’ve got to get on top of the inflation challenge in our economy.
There are three key parts to tackling inflation – helping people who are hurt most by it, addressing the supply pressures that help cause it and delivering a responsible budget to avoid adding it – and our plan hits all these targets.