The Australian government is pressing the economic accelerator just as the Reserve Bank slams on the brakes with a series of interest rate increases, according to economists.
On Sunday, RBA chief economist Sarah Hunter acknowledged that government spending was adding to demand across the economy, while making clear the central bank cannot influence fiscal policy and instead has to take its effects into account when setting interest rates.
“The RBA just has to set interest rates around government spending,” said Damien Boey, a Portfolio Strategist at Wilson Asset Management.
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“It (the RBA) looks at the aggregate inflation picture and doesn’t like the rate it is growing at. But from a markets perspective we think inflation is now going to come down. The private sector is now getting hammered by the RBA hikes.”
Public spending is forecast to remain near historically high levels as a share of economic output, reaching 26.9 per cent of gross domestic product (GDP) in the year to June 2027, before edging up to 27.1 per cent in fiscal year 2028.
The high level of government spending comes as weak productivity growth limits how quickly the economy can expand without pushing inflation higher than the RBA’s 2.5 per cent target.
“So the (Australian) government has started to cut back spending a little bit, like they flagged in the budget,” said Boey.
“But that’s not to say they’re planning austerity. If government spending plateaus at a constant share of GDP, which is kind of what the government is trying to flag, then that spending shouldn’t add to inflation.
“It adds to debt, but not too many people are concerned about the sustainability of government debt in Australia.”
In France public spending reached 57.2 per cent of GDP in 2025. The European nation is now battling street riots as protestors demand more welfare and looters target shops. In the UK, government spending hit 44.3 per cent of GDP over the fiscal year to June 30, as its government battles surging interest costs on its debt.
Interest rate outlook
Boey cautioned that a rate increase on November 3 is far from certain, with at least five of the RBA’s nine monetary policy board members required to vote in favour.
On Wednesday, consumer price index (CPI) inflation data for the September quarter is expected to lock-in the RBA’s decision to hike or not next week.
Boey points to Purchasing Managers’ Indexes (PMIs) as evidence the economy is already slowing or contracting.
The monthly, survey-based indicators track business conditions across Australia’s manufacturing and services sectors.
“If you look at PMIs for Australia, above 50 is meant to be expansionary for the economy, but they’re all below 50 (suggesting contraction),” he said.
Interest rate futures traders are now pricing in a 62 per cent chance that the central bank will lift rates from 4.6 per cent to an 18-year high of 4.85 per cent on Melbourne Cup Day.
The odds of an increase have steadily risen since an October 21 speech by RBA Deputy Governor, Andrew Hauser, at Citi Australia’s Investment Conference.
Mortgage repayments have already risen by about $424 a month for borrowers on floating rates following four interest rate increases this year, assuming a $700,000 loan, according to MortgageAgent.com.
Another rate increase also threatens to accelerate the downturn in national property prices.
Cotality data shows, Sydney’s housing market fell 8.6 per cent between its February peak and the RBA’s last latest rate increase on September 29. While Perth property values have fallen 6 per cent since peaking in April.
