AARON PATRICK: Deciding debt is path to power, Jim Chalmers sets terrible example for future political leaders

One reason around 65 per cent of Australians with debt will not benefit from more interest rate cuts is because Anthony Albanese and Jim Chalmers have decided borrowing is the way to keep power.

On Wednesday, Reserve Bank of Australia governor Michele Bullock and one of her assistant governors, Christopher Kent, confirmed what private-sector economists have long asserted: government borrowing drives up interest rates.

The problem was illustrated a couple of hours after Ms Bullock’s comments to a parliamentary committee. Despite weak economic growth of 2.1 per cent in the year ended September 30, the central bank can’t cut interest rates because inflation is too high.

Among the upward pressures on inflation is a federal Budget deficit of $10 billion last financial year forecast to reach $42 billion this year.

The deficit, or the difference between what the government spends and receives, is the consequence of the Prime Minister and Treasurer’s decision to expand the welfare state, hire thousands of public servants, bail out corporate interests and provide modest income-tax cuts.

Speaking in the cautious, qualified language of an economist, Ms Bullock told a parliamentary committee government spending “will put a bit of upward pressure on the neutral rate”.

“It means if we want a restrictive policy, it means that the cash rate has to be set higher than a higher neutral rate,” she said in response to a question by Liberal senator James Paterson.

Staying afloat

The “neutral rate” is the level of official interest rates that neither expands or contracts the economy, like a floatation device that neither rises or sinks in the ocean. Restrictive policy refers to using interest rates to hurt people, economically, to get them spending less so inflation falls.

What Ms Bullock means is that interest rates have to be higher when governments borrow, because the money they inject into the economy has an inflationary impact the central bank has to counter.

In other words, the Reserve Bank has to shut down the bar tab that’s been put on the government credit card.

“There’s a fairly clear connection that larger deficits or smaller surpluses, all else being equal, lead to higher interest rates being required,” Monash University economist Isaac Gross told The Nightly.

The relationship between deficits and interest rates is hard to measure, but not abstract.

Previously anticipated interest rate cuts have evaporated, and some economists think rates will have to rise to stamp out inflation.

Notwithstanding a 1 percentage point tax cut coming in July, the only way most indebted Australians can receive a significant income boost is through an interest rate cut (which hurts savers).

Deflections

Challenged over the consequences of his government’s spending, Dr Chalmers deflects. He often complains about the large debt inherited by the Labor government, without acknowledging that he argued in opposition the Coalition should have borrowed more during the pandemic.

He claims credit for surpluses in 2023 and 2024, which were due to unexpected increases in gas and iron ore prices.

Apart from the financial harm to Australians in the private sector from unnecessarily high interest rates (welfare recipients, students and public servants benefit from deficits), budget-driven government sets a terrible example.

Mr Albanese’s huge victory in the May election and persistent popularity sends a signal to future political leaders that responsible economic management, once celebrated as balancing the books, is not the path to winning and retaining power.

The Government forecasts growth in revenue and slowing spending increases will naturally balance the Budget — in 2036. By then Mr Albanese will be 73, and presumably long retired from politics.

Dr Chalmers will be 58, and potentially a resident of the Prime Minister’s Canberra residence, The Lodge.

If the interest payments on the debt he racked up surpass spending on the military or pensions for the elderly, Prime Minister Chalmers might, deep in his heart, regret indebting his fellow Australians so deeply.