High levels of government spending are not aiding the battle against inflation, according to a major global ratings agency. S&P, the global ratings agency, suggests that the Australian government’s spending is impeding efforts to reduce elevated inflation levels. The report notes that the government is now spending $50 billion/year more than it was before the pandemic, impacting the economy.
The S&P report also indicates that the Reserve Bank of Australia (RBA) might need to raise rates again in 2023. This decision will hinge on how close they are to bringing inflation down within the target, as the RBA has already revised its forecasts due to an unexpected increase in spending by the Australian government.
The main drivers of higher spending include investments in infrastructure and other services, a policy adopted by both the current Albanese government and the previous administration. Approximately 55% of the increased spending falls under the federal government’s responsibility, with the remaining 45% attributed to state and territory governments.
Anthony Walker, S&P Ratings Analyst, highlighted that much of the increased spending has been funded by higher incomes from income tax and other revenue streams. He also warned that if the government’s aggressive spending policy leads to a rise in inflation, Australian households could face another challenging year in 2024.
Jim Chalmers, the Australian Treasurer, countered this view by stating that the Albanese government has responsibly managed the economy. Chalmers emphasized that the pressure on inflation is being overplayed and pointed to a 2% increase in gross domestic product (GDP) compared to pre-COVID-19 levels. Referring to last year’s $22 billion surplus, , he claimed it as an indicator of responsible economic management, suggesting that the government’s strategy is starting to yield positive results.
Further complicating the inflationary landscape is the Prime Minister’s recent deal, resulting in states receiving significant payments for assisting in the reform of the National Disability Insurance Scheme. While the government argues that these measures will ensure real savings in the future, Walker adds that the current high levels of spending are likely to lead to additional expenditures in the future.
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