A top economist has warned interest rates could continue to go “up and up” throughout 2027 if government spending does not come down.

It comes after the RBA hiked the cash rate to a 15-year high of 4.6 per cent on Tuesday.

EQ Economics’ managing director Warren Hogan said Australian governments have “not shown any restraint” as inflation has continued to wear on.

Mr Hogan said governments could have been given the benefit of the doubt for the level of spending in 2024.

“But it’s quite clear, with the resurgence of inflation in the last 12 months as our economy recovered from very weak growth to only 2.5 per cent… (this) was clearly enough to trigger inflation,” he told News24.com.au.

“The governments of Australia are all planning to increase spending by around 3 per cent when the economy’s capacity is 2, that really means the rest of us are getting squeezed out.”

Mr Hogan said it was the RBA’s responsibility to enforce restraint on the private sector through higher rates, but if the government was not cutting back, rates would continue to go up.

“If the governments of Australia don’t think about really cutting back recurrent spending quick smart, the cash rate might not just go up one or two more times,” he said.

“It might just keep going up and up and up all through next year. And of course we know where that ends in a nasty recession, if not a financial crisis.”

Mr Hogan said the federal government’s recurrent spending had begun to “surge” in recent years when they had been “very stable” for about 40-50 years.

“But from about 10 years ago, the federal government started with the NDIS and various things, increasing payments and locked in spending. It’s now gone from the average of seven and half percent of GDP to 11,” he said.

“That’s a 40 per cent plus structural increase in the presence of federal government, locked in. And I don’t think our economy is coping with it at all.

“The states are increasing their spending as well, but it’s really that federal increase in spending that’s the standout and the problem and needs to be cut back.”

Mr Hogan said the cost of higher government spending was more than just higher taxes in order to fund it, but also the “squeezing out” of the private sector which was pushing down living standards.

He said the combination of higher taxes and lower standard of living came at a time when the Australian economy didn’t have “much room to manoeuvre”.

“Because, as the governor reiterated again today, we don’t have much spare capacity because of the ageing population,” he said.

Mr Hogan said Australians had to face the ultimatum of choosing between less government spending now or a “crisis” later.

“We’ve got to decide as a community now, do we actively pursue a program of reducing the size of federal government and do it in a controlled manner ourselves, or do we wait for a crisis to force us in an uncontrolled manner for it to happen upon us?” he said.

“I think we’d all agree doing it ourselves would be much better.”

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