The Reserve Bank has two objectives, price stability – keeping inflation between 2 per cent and 3 per cent – and maximum employment. At a recent event hosted by the Committee for Economic Development of Australia, RBA governor Michele Bullock made a significant remark about the trade-offs involved. The unemployment rate needed to increase to 4.5-5 per cent, she said, a level that would “probably take enough heat out of the labour market that it will ease pressure on inflation”.
The comment came as a surprise to many as the labour market hadn’t been considered a significant source of recent inflationary pressures. There’s been no overall national gain in real wages such as we saw in the Whitlam years, just some long-awaited increases in sectors such as nurses, care workers and first responders. Bullock was clearly accepting the inflation fight could push the country even closer to a recession.
Unemployment edged up to 4.6 per cent in the latest reading from the Bureau of Statistics, and this week the RBA raised interest rates for a fourth time this year, to a 15-year high.
The comment on unemployment is politically very significant, as it broadens the potential impact of the inflation-fighting campaign. It’s not only borrowers – especially mortgage holders – who will feel the impact of rising interest rates, but also those who lose their jobs or become fearful of the possibility.
This feeds a growing sense of being disenfranchised by the major parties. People can’t understand why, when they didn’t vote for United States President Donald Trump, and are nowhere near the war in the Middle East, they should have to suffer the impact of both on their cost of living and job security. It’s bewildering that Australians should have to live with the consequences of Trump.
High inflation has seen off governments around the world in the post-pandemic era – it stirred a voter backlash against former US president Joe Biden despite the US economy’s remarkable recovery from that downturn. By the 2025 election, the Albanese government was able to tout the easing of price pressures and RBA rate cuts as evidence of its sound economic management.
Now, Labor will struggle to convince voters of the integrity of its fiscal management. Labor delivered surpluses in 2022/23 and 2023/24 and has been building on this since, but people have short memories. It is so easy to say the government should be running more surpluses, with strong employment and favourable commodity prices. Nobody seems prepared to say how – what spending should be cut, or taxes increased? Belt tightening would seriously risk a recession, and would be unlikely to slow inflation much given that there is little hope of an end to the Middle East war that is disrupting supply chains and driving fuel prices higher.
Moreover, does the Coalition really want to cut back on initiatives to ease the cost of living? This is a complex area with complex trade-offs that are hard to “explain” to the public.
Nevertheless, both the Coalition and One Nation – the latter hoping to build on its fortunes in the polls – will make much of the resurgence in inflation and interest rates, and continue to prosecute their simplistic “silver bullet” diagnoses, without any hint of what they would actually do. The political slogans will flow. Do I have to give up owning a home to control inflation? Why should I have to lose my job to control inflation? And many shriller versions to come. The key political point is that there will be pain from the anti-inflation strategy, so which group will bear most of it and how is it distributed? Those with savings will benefit; those in debt will take the brunt.
The scary reality is that interest rates may well rise again, with some market commentators fearing a prolonged Middle East war will drive the oil price as high as US$150 a barrel from about US$100 now, exerting further substantial pressure on inflation here and globally.
Does the Coalition really want to cut back on initiatives to ease the cost of living? This is a complex area with complex trade-offs that are hard to “explain” to the public.
The consumer prices data announced the day after the RBA rate increase showed the inflation rate had jumped to 4 per cent in the 12 months to August, from 3.5 per cent in the year to July. It was driven by housing costs and a nearly 15 per cent rise in fuel prices – due in part to the unwind of the excise cut. The RBA’s preferred “trimmed mean” measure was steady at 3.6 per cent, still well above target.
While the Albanese government has struggled to respond to these global issues, the opposition parties seem to be elsewhere in the policy universe. The Coalition’s whole strategy is based on myths, the first of which is their claim that they are better economic managers. This certainly wasn’t the case in the Howard–Costello days, as that leadership squandered the unexpected gains from China’s demand for resources that boomed in the late 1990s. Instead of making savings, that government promised unaffordable personal tax cuts, middle-class welfare and generous tax breaks to property investors and via superannuation concessions. In many ways the Howard government laid the foundations for the collapse of responsible fiscal management, with deficits as far as the eye could see.
The last Coalition government did even worse, with former prime minister Scott Morrison flooding the economy with billions in response to the pandemic that created the so-called homegrown inflation they have tried to pin on the current government. Government spending then reached a record 31 per cent of GDP, compounding budget deficit challenges. The heavy focus of much of this spending on housing blew up the industry with very large increases in construction costs. This exposes the hollowness of the opposition’s claims about reckless spending by the current government – it’s the pot calling the kettle black.
There are similar exaggerations in the Coalition’s attack on immigration, reiterating One Nation’s myth of “mass migration” where their proposed cuts would surely guarantee our slide into recession.
Probably the most ridiculous and irresponsible suggestion from the likes of Opposition Leader Angus Taylor and shadow treasurer Tim Wilson was their recent proposal of a double excise cut in tobacco and fuel. The idea is to deal with illegal tobacco and offer fuel price relief as a key element of the cost of living. They claimed the cuts would be fully funded. I assume they meant that cuts to the tobacco excise would encourage smokers back to “legal tobacco”, to the detriment of organised crime. This additional excise revenue would fund the cut in the petrol excise. This seems to assume, though, that these black market operators wouldn’t further cut the price of “illegal tobacco”, which they seem to have capacity to do.
Much of the façade that the opposition has sought to create by accusing the government of profligate spending and poor fiscal management was blown out of the water by the recent release of the final budget outcome for 2025/26, which clearly indicated the extent of continued repair. To quote Treasurer Jim Chalmers, “the bottom line is better than what we inherited, better than what was forecast at the election and it has improved since the budget”.
The deficit in 2025/26 was $22.3 billion, which is $6 billion better than the estimate in the May budget. It was also more than $20 billion below the $43 billion forecast by the opposition before losing government – so the deficit is barely half what the government inherited. At just 0.8 per cent of the economy, it is also less than half the average deficit between the global financial crisis and the pandemic.
The credit ratings agencies have confirmed our triple-A borrowing status and we have the strongest budgetary position in the Group of 20, with lower gross debt than every major advanced economy. The result reflected lower-than-expected spending and improved outcome for receipts. Tax receipts relative to GDP were still less than the historic high achieved by the Howard government.
This result is a stronger budget in every year of the Albanese government than it encountered in 2022. Over the past four years the budget deficit is almost a quarter-of-a-trillion dollars better off. As a result, gross debt is $198 billion less than the level when Labor came to power. As a share of the economy, gross debt was 33.2 per cent in 2025/26, down from 38.3 per cent in 2021/22. On the previous government’s trajectory, gross debt would have been well above a trillion dollars, closer to 45 per cent of GDP, the opposition having added two thirds of the debt in the budget.
It’s certainly time for a reality check on the opposition’s claims about their capacity to control government spending and fiscal policy. If they choose to perpetuate the illusion that they are better stewards of the economy, and maintain their focus on cutting spending, they need to be specific about exactly what expenditure they would cut and how they would avoid undoing any cost-of-living relief that the government is delivering, or offer their own alternatives.
However, the opposition seem happy to draw on Mark Twain’s advice to “get your facts first, then distort them as you please”. This is unlikely to be an election-winning strategy, especially when the voters want the truth and real action on the cost of living. We’re out there, the Liberal voters holding out for honest analysis and decent policy. We just need to see some clear sign of it.