“Counterproductive” mass government spending during the fuel crisis is worsening Australia’s already high inflation rate, a leading economist has warned.
Governments across the globe have been warned against cash splashes while fuel prices remain elevated during the oil crisis.
The International Monetary Fund earlier this month cautioned against large public spending when it warned of a global recession due to the oil crisis.
Renowned economist Paul Sheard, who served as vice chairman at S&P Global, said lavish government spending could worsen the inflation crisis.
“If you say, ‘we need to put more money back in households’ pockets because they’ve been hit by the rising prices,’ that’s putting more demand stimulus into a system that probably needs a little bit more restraint and patience,” Mr Sheard told Business Weekend.
“It can be a little counterproductive in that sense that – particularly if it’s done on a mass scale – you’re really doing a fiscal stimulus which would tend to be inflationary into a situation that is already inflationary to start with.”
Inflation in the 12 months to February was already elevated at 3.7 per cent.
This figure, which sits outside the Reserve Bank of Australia’s 2-3 per cent band, is expected to balloon upwards of five per cent once the fuel crisis is considered.
Australians will see just how impactful the price rises have been on Wednesday when the Australian Bureau of Statistics hands down the March inflation figures.
Government spending was already a contributor to the high level of inflation before the crisis, along with low productivity and the resurgence of the private sector last year.
Labor handed down cost of living relief during the fuel crisis by spending $2.6 billion to halve the fuel excise for three months.
Meanwhile, all states and territories have agreed to forego their GST take from the excise.
Former Reserve Bank of Australia economist John Simon said governments needed to avoid issuing universal subsidies which heap pressure on public debt.
“They need to resist the universal subsidies because, frankly, I don’t need electricity subsidies (and) people don’t need fuel subsidies to fill up their Porsche Cayennes,” Mr Simon told Business Weekend.
“What you want and what the IMF is recommending is that, to the extent that the government feels support is necessary, that they target it.”
Meanwhile, the IMF said large government spending would be at odds with central banks around the globe which are struggling to keep inflation under control.
“Avoiding fiscal stimulus is also critical when inflation is rising, so as not to complicate central banks’ task,” the IMF said.
Additional government handouts may seem tempting for short term relief, but they could force the RBA to lift the cash rate and hurt Australians in the long run.
Economists expect the RBA to deliver another cash rate hike next month.
This will be the third consecutive hike this year if it eventuates and will undo all three cuts handed down in 2025.