22 February 2024
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Big spending state governments keeping inflation high

Peter Switzer
24 October 2023

If there’s a good news story for the Albanese government, it has to be the federal budget surplus. This is good news for fighting inflation, but right now the state premiers are spending like drunken sailors, which isn’t helpful for the fight against inflation and the related rising interest rates.

Calculations from accounting firm EY revealed by The Australian’s Patrick Commins say “…the states for the first time are set to borrow more than the commonwealth at nearly $100 billion this financial year.”

This bad news for inflation comes ahead of the September quarter’s Consumer Price Index out tomorrow, which is tipped to be a higher-than-wanted number because of the 35% rise in petrol prices since July. Of course, you can blame Vladimir Putin and OPEC+ for that ‘tidy’ work.

Commins puts the debt repayment across all our governments at $43 billion, which is more than our defence budget, or the NDIS spend! It means governments should have the same wish as all borrowers i.e., to see interest rates fall. However, like a lot of Aussies, they’ve borrowed too much. Luckily for them, we pick up the bill.

So, who are the biggest borrowing states?

“More than 60 per cent of the new state and territory debt will be issued by Victoria ($33.7 billion) and NSW ($22.9 billion), the EY figures show, despite the two states accounting for only half the economy. Queensland’s government is set to borrow $15.5 billion,” Commins explained.

The impact of big spending not only adds to inflation, but also the debt servicing cost means money that should be going to services is tight. It’s lose-lose. But undoubtedly, there is a winner, and that’s job creation.

One of the surprising aspects of this interest rate rise cycle has been the slow response of the labour market. In fact, last week’s September jobs report showed unemployment fell to 3.6% from 3.7%, when really after 12 interest rate rises the jobless rate should be at least 4%.

As EY economist Cheryl Murphy bluntly pointed out about the states, “…it is easy to conclude that there is a lot of spending going on”.

One of the new problems economists have with inflation is the possibility that it will remain sticky, say around 4% or 5%, and that will delay the time when interest rates would be cut, so pressuring state governments to get their fiscal house in order is important for borrowers and Dr Jim Chalmers. If we go to the next election at the latest date possible i.e., May 2025, with interest rates where they are now, Albo will cop the blame.

Unemployment:

Most governments are now in Labor’s hands and historically they’ve been big spenders. The Federal government has been in a spending mood too, with economist Chris Richardson figuring that Dr Jim would inject $34 billion into the economy over the four years to 2025-26, which isn’t great for inflation.

Independent budget expert Chris Richardson said that while the government had allowed the huge tax revenue windfalls from a booming jobs market and soaring commodity prices to largely fall through to the bottom line, policy decisions taken by Labor would inject $34 billion into an already overheated economy over the four years to 2025-2026.

According to Jarden economist Carlos Cacho, last financial year’s $22 billion surplus and next year’s predicted $13.9 billion deficit is “the biggest reversal in fiscal stance in at least two decades,” and that’s not great for killing inflation.

Treasury secretary Steven Kennedy faces a Senate estimates grilling on Wednesday morning, followed by the new RBA boss Ms Bullock on Thursday. This is bound to focus on the downsides of government spending on inflation and the impact on interest rates.

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