Budget blowout driving up rates

Cash handouts and election outlays will fuel more inflation and interest rates rises, so the Coalition and Labor must cut spending or raise taxes to help the Reserve Bank of Australia cool price pressures, former senior government economists say.

“How do we start to take seriously this fiscal challenge we have in the context of high and rising inflation? That is a key challenge that either of us will face no matter who wakes up as the treasurer on the 22nd of May,” Dr Chalmers said.at the press club debate in Canberra, neither side proposed significant reforms to deal with the new inflationary world and entrenched budget deficits.

Mr Frydenberg said the budget deficit was forecast to halve over the next four years – from $80 billion in 2021-22 to $43 billion in 2025-26 – with more conservative commodity price assumptions than used by former Labor treasurer Wayne Swan, who Dr Chalmers worked for. “But the point that I make about this is the quantity of spending obviously matters a great deal – we pay interest on debt that the government has racked up and so it matters,” Dr Chalmers said.Treasury, in the March 29 budget, forecast inflation to peak at 4.25 per cent this year, but that is already wrong by about 2 percentage points based on higher RBA forecasts released on Tuesday.

The discretionary spending was being injected when there was a low 4 per cent unemployment rate and high inflation of 5.1 per cent inflation.Labor has matched much of the government’s spending pledges and has also outlined more spending for aged care, childcare, skills and climate change. “As inflation and interest rates rise, governments will start to feel the pinch of higher public debt interest. They will need to turn their mind to how we repair the budget, and just after an election is possibly the time to do things.

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