Labor urged to reign in spending after interest rate hike by Commonwealth Bank of Australia’s Luke Yeaman

Australia’s largest bank has joined the chorus of economists and political figures calling for government to rein in spending after the Reserve Bank of Australia hiked rates.

The central bank’s governor Michele Bullock was forced to admit public spending influenced the recent rate rise while inflation remains well outside the RBA’s 2-3 per cent target band.

Commonwealth Bank of Australia’s chief economist Luke Yeaman said the government needs to acknowledge the nation’s economic “speed limit” that allows private activity without inflation surging.

“While we have this speed limit, if you want to see private activity grow, if you want to see household consumption grow (and) you want to see businesses able to invest, then it’s good for the government to make as much room for that as possible,” Mr Yeaman told Business Weekend.

“You want to see government spending starting to wind back to allow the private sector to come online.”

He noted Australia’s productivity, which dwindles around historical lows at about 0.8 per cent per annum, needed a boost to lift the nation’s economic speed limit.

“In the longer term, if you can lift productivity, you can have more growth across the whole economy,” Mr Yeaman said.

“But in the near term, we need government to be showing some restraint – keeping spending under control so that there’s more headroom for the private sector and consumers and investment to lift.

“Which ultimately is good for productivity. More business investment means higher productivity over time.”

Outside of the Covid-era, government spending as a proportion of GDP is the highest in 30 years.

Treasury forecasts spending to GDP will hit 26.9 per cent in 2025-26.

Meanwhile, government spending sat at an average of about 22 per cent since the 1960s.

This comes as inflation rose 3.8 per cent in the 12 months to December while trimmed mean inflation lifted to 3.3 per cent.

In contradiction to Treasurer Jim Chalmers’ claim, Ms Bullock admitted government spending has played a role in inflation’s rise despite remaining tight lipped after hiking rates on Tuesday.

When asked by Liberal MP Simon Kennedy if government spending affected the bank’s decisions, Ms Bullock said: “Well, it does, as does private. It’s part of aggregate demand.”

“It does, because as you say there’s some public demand and then there’s transfers and taxes which also flow into that,” Ms Bullock told the House Standing Committee on Economics.

“It’s factual, it is not an opinion, it’s not a judgement, it is a fact. That’s all it is.”

Leading economists such as AMP’s Shane Oliver, HSBC’s Paul Bloxham and Warren Hogan have also called for the government to reel in spending.

Many Opposition figures have joined the chorus alongside former RBA board member Roger Corbett and former Labor cabinet minister Joel Fitzgibbon.