An economics professor has commented on how the Australian government’s spending is prolonging an era of inflation.
The Reserve Bank of Australia left interest rates on hold at 4.35 per cent after the board met for its June meeting, with RBA governor Michele Bullock stating the bank had to consider government budgets.
“Part of the reason why inflation is holding up is because demand is holding up,” Ms Bullock said.
“We’re going to have to take into account a lot of the new information from the national accounts, the budgets, the labour market and new inflation information”
Gigi Foster, professor of economics at the University of New South Wales, said the government is keeping inflation high in their attempts to pump money into the economy.
“It’s a continuation in a small scale of what we saw during the Covid era when the government has kicked off this inflationary era by pumping money into the economy while essentially telling businesses they couldn’t trade,” Ms Foster told Sky News Australia.
“That’s a recipe for creating inflationary conditions.”
Ms Foster explained the government’s “white horse” attempts to rescue the Australian economy were actually fostering the perfect environment for a recession.
“The problem is we’ve now got this persistent model in our minds that when there’s a problem the government has to come in on their white horse and stimulate us out of the problem, make a subsidy decisions or have some kind of rebate or writing money cheques,” she said.
“That’s easy for a government to do. It’s a lot harder… to solve the structural problems in Australia’s economy and to scale back the scale of the public enterprise.
“That’s very, very difficult politically.
“When these governments are continuing to splash money around, even if it is to try to help people with the cost of living, there is a tendency for that to be inflationary.”
Speculating the situation is set to get worse before it gets better, Ms Foster predicted that Australians would not see a rate cut this year.
“We are already kind of in a recession – if you look at GDP per capita figures, they don’t like to think about this,” she said.
“We kind of are already experiencing the economic distress that the government’s caused, starting with the Covid policy fiasco and there’s no really easy way out.”
In its monetary policy decision delivered on Tuesday, the Reserve Bank said inflation remained above target but has “fallen substantially” since its peak in 2022.
The RBA said returning inflation to its two to three per cent target range within a “reasonable timeframe remains the board’s highest priority”.
“The economic outlook remains uncertain and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth,” a statement read.