Australians have been presented a radical idea that would help limit various governments’ role in fuelling inflation while price pressures hurt households.
Inflation sits outside the Reserve Bank of Australia’s 2-3 per cent target band at 3.8 per cent while interest rates are expected to rise two more times this year.
The price rises have sparked fear amongst politicians and economists, with many blaming federal government spending while others say private sector recovery and meagre productivity growth are responsible.
Westpac’s chief economist Luci Ellis said one of the problems boosting inflation was price rises across various levels of government.
“Postal charges (are) up 5 per cent, council rates up around 6 per cent, water in Sydney went up 13 per cent in October,” Ms Ellis told Business Weekend.
“These are all things the various governments at different levels decide.”
She called for a major change that would help the RBA get inflation to the midpoint of its target band.
“What would be better to see would be if all levels of government agreed that if we’ve charged the Reserve Bank with getting inflation at 2.5 per cent, they should be raising their prices by only 2.5 per cent as well,” Ms Ellis said.
Her call comes as Sydneysiders saw water prices for an average family of four jump by $168 between 2025 and 2026.
Meanwhile, a typical Sydney family will be paying $1695 for their annual water bill by 2029/30 – a $475 jump from their current budget.
Ms Ellis also called for the federal government to limit spending on the care economy as the NDIS continues to expand despite efforts to halt its growth.
“We’ve got to get a grip on some of the social care spending growth,” she said.
“These are important programs that are delivering good outcomes for people, but we need to do it more efficiently and more sustainably.
“Otherwise, the tax burden on the household is going to get higher and higher.”
Intense debate has raged over the government’s role in fuelling inflation since it shot up in the back half of last year.
Following the RBA’s February rate hike, Treasurer Jim Chalmers repeatedly boasted that government spending was not a factor in the hike.
However, RBA governor Michele Bullock was forced to admit public spending played a role when questioned about government spending’s impact on the bank’s decisions.
“Well, it does, as does private. It’s part of aggregate demand,” Ms Bullock told Liberal MP Simon Kennedy at a House Standing Committee on Economics.
“It does, because as you say there’s some public demand and then there’s transfers and taxes which also flow into that.
“It’s factual, it is not an opinion, it’s not a judgement, it is a fact. That’s all it is.”
Similarly, after the Australian Bureau of Statistics revealed that the economy lifted 2.6 per cent last year, some economists warned this was excessively boosted by public spending.
It comes as productivity remains low, heaping pressure on inflation.
Capital Economics’ head of APAC Marcel Thieliant said the level of public spending, which makes up almost 29 per cent of the economy, could force the Reserve Bank of Australia to hike interest rates.
“The inexorable surge in public spending in recent years is a key reason why capacity constraints never disappeared despite aggressive monetary tightening,” Mr Thieliant said.
“And with scant evidence that Labor has learned its lesson, the RBA has more work to do.”