So say “economists“:
Cost-of-living spending in the federal budget “100 per cent” helped pull forward the Reserve Bank’s decision to increase official interest rates, say economists who warn most Australians will suffer real falls in wages over the next 18 months.
As Prime Minister Scott Morrison and Treasurer Josh Frydenberg defended their handling of the budget, senior economists said the extra spending promised by both sides of politics in the election campaign was adding to inflationary pressures.
…The March 29 budget contained $25 billion in extra spending initiatives over the next four years, including $5 billion for the $250 cost-of-living bonus and the 22.1¢-a-litre reduction in fuel excise.
The super-sized low and middle-income tax offset, which will start flowing into bank accounts from early July, will pump at least $12 billion into the economy.
Economist Steven Hamilton, a visiting fellow at the Tax and Transfer Policy Institute at the Australian National University, said there was no doubt the extra spending in the budget – on top of what was being promised by both major parties during the campaign – had been a factor in the Reserve Bank’s move.
“The RBA is targeting where inflation will be in about 12 months’ time. You can’t inject about 1 per cent of GDP into the economy and not have an impact.”
Grattan Institute economics policy director Brendan Coates said it was clear the budget’s extra spending was adding to the nation’s inflation pressures, forcing the RBA to act.
It’s true that it is contributing factor even if it is partial analysis given the many factors at play.
The clincher for the blame is more about the role of fiscal policy in the cycle than it is the actual spending. If it is the role of fiscal policy to be reduced to take pressure off interest rates in a mature cycle – and it is conventional wisdom that it is – then Morrison is guilty as charged.
This is easily illustrated by the counterfactual. If the budget had instead withdrawn 1% of GDP in spending then would the RBA have hiked? It is doubtful.
The LNP worship of John Howard, who did exactly the same thing in 2007, appears to have killed it.
