The Australian economy is set to dominate the federal election campaign, with Labor facing intense voter anger over rising interest rates and persistent inflation. The Reserve Bank's decision to lift the cash rate to 4.6% – a 15-year high – has sparked widespread criticism, with talkback radio callers describing the governor and the bank's board as “heartless” and “cruel”.
Voter misunderstanding of economic levers
Research released by the Reserve Bank in July revealed a significant gap in public understanding of how interest rates affect inflation. Only 25% of respondents correctly explained that higher interest rates would ultimately lead to lower inflation, while more than half believed higher rates would push up costs – the opposite of the central bank's objective.
Labor has struggled to defend its role in the rate decision, with Anthony Albanese and Jim Chalmers blaming Donald Trump's war in Iran and the resulting global fuel shock for the inflation quagmire. Headline inflation rose to 4% in the year to August, up from 3.5%, while trimmed mean inflation held steady at 3.6% – above the bank's 2-to-3% target band.
Economic indicators worsen
Unemployment climbed to a near five-year high, and house prices fell for a sixth consecutive month after changes to negative gearing and capital gains tax. Reserve Bank governor Michele Bullock attributed some of the inflation to excess demand from government spending, with Middle East fuel disruption adding to domestic problems.
New South Wales Premier Chris Minns distanced himself from federal Labor colleagues, noting his government had controlled spending through offsets. Chalmers told a summit organised by the Australian Public Policy Institute that Australia's economic challenges were “not exclusively global, but right now they are primarily global”.
Budget pressures ahead
Chalmers says real spending growth has averaged 2% a year under Labor, but this figure is dragged down by a sharp fall in 2022-2023 as pandemic support packages were wound back. Excluding that year, real spending has grown by an average 4.2% a year, compared with 2.6% under the Coalition in the six years before the pandemic.
Respected budget watcher Chris Richardson called the economy “completely clapped out”, warning that every time there is economic sunshine, the inflation dragon rears its head again. Treasury forecasts interest payments will overtake Medicare spending by 2028-2029 due to $1.2tn in federal debt, as reported by the Australian Financial Review.
Chalmers and finance minister Katy Gallagher will need to find more savings before the mid-year budget update, due just before Christmas. Some modest savings, including capping allied health benefits for veterans and reducing the private health insurance rebate for seniors, have already proved politically painful.
Opposition's opportunity
Liberal leader Angus Taylor has refused to give Labor slack for the international energy crisis's contribution to inflation. One Nation, which looks set to win seats in Victoria's November state election and NSW in March, could reflect voter anger, but Taylor must convince voters his plans would turn things around.
Challenged on spending cuts, Taylor nominated Labor's net zero by 2050 programs, winding back housing delivery vehicles, slashing “corporate welfare”, limiting NDIS and welfare spending, and supporting first home buyers only to Australian citizens. As tough as this week was for Labor, its struggles on inflation, high interest rates and cost-of-living pain look likely to grow, with hip-pocket politics once again becoming the government's biggest vulnerability ahead of the election.
