Jim Chalmers denies government spending is fuelling inflation after RBA hikes rates just six months after cut

Jim Chalmers has denied excessive government spending is fuelling inflation with the Reserve Bank hiking interest rates just six months after cutting them for the first time since Australians used up their $900 payments during the Global Financial Crisis 17 years ago.

“What I was doing yesterday was pointing out to people who want to pretend wrongly, dishonestly, that this inflation challenge is all government spending,” the Treasurer told ABC Radio in Brisbane on Wednesday.

Dr Chalmers blamed private sector activity for the inflation surge after Treasury, the RBA and the major banks had consistently underestimated the inflation challenge, with a former Reserve Bank economist now predicting four rate hikes in 2026 and 2027 to bring inflation back within the target band.

The RBA on Tuesday hiked rates just six months after cutting them for the first time since October 2009, following the aftermath of Australians getting $900 cheques or bank payments from the Commonwealth during the GFC.

“We know that prices are higher than anyone would like but more than acknowledging that, we’re acting on that,” Dr Chalmers told another ABC interviewer in Melbourne.

“It’s the reason why we’re cutting taxes and making medicines cheaper and providing more bulk billing and student debt relief and all of that is because we understand that people are under pressure, whether it’s at the checkout or elsewhere.”

But a former Treasury economist disagrees, with Judo Bank’s chief economic adviser Warren Hogan noting there was a clear link between high government spending and soaring inflation.

“That is self-evident. The government spending is a big factor in the inflation and the weak productivity we have seen throughout the last four years,” he told The Nightly.

“That is a fact. We have seen a structural shift up in the size of government.

“The short time between cuts and hikes reveals that the RBA and the government do not understand what is happening in the economy, but more importantly they should not have cut rates before inflation returned to target when they had not raised rates as much as everyone else.”

Tuesday’s 25 basis point hike took the RBA cash rate to 3.85 per cent and reversed a rate cut in August, marking only the third occasion of a hike occurring so soon after a cut since the Reserve Bank began announcing a target cash rate in 1990.

Even so, Federal Government payments in 2009-10 — when Dr Chalmers was then treasurer Wayne Swan’s principal adviser — made up 25.8 per cent of gross domestic product.

This financial year, government spending is expected to comprise 26.9 per cent of the economy even though there is no global economic calamity requiring a multi-billion-dollar stimulus package.

Higher government spending means the Reserve Bank has to raise interest rates, former RBA economist and Monash University senior economics lecturer Zac Gross told The Nightly.

“There’s no doubt that fiscal policy is an important determinant on how the economy is travelling and where unemployment is and that has implications for inflation,” he said.

“It’s not a given that higher spending leads to higher inflation — it may very well lead to higher interest rates.”

With Tuesday’s rate hike factored in, the Reserve Bank may have to hike rates four times in 2026 and 2027, he added, based on their updated inflation forecasts.

“I can understand why the RBA wouldn’t want to commit to a large number of hikes or instead potentially scare the horses,” Dr Gross said.

The Reserve Bank is now forecasting that headline inflation will hit a three-year high of 4.2 per cent by June 2026, with its updated Tuesday afternoon predictions replacing the November forecasts of a 3.7 per cent inflation rate by the middle of this year. Inflation isn’t expected to fall within the 2-3 per cent target band until mid-2027.

“It’s pretty clear from reading the statement on monetary policy - they assume two more hikes but even with those two hikes it’s not enough to get inflation back to the mid-point of the band by the end of the forecast horizon,” Dr Gross said.

“Three plus the one we’ve had gets you to four hikes.”

Unlike the aftermath of the GFC, both headline and underlying inflation are running above the RBA’s target, surprising most economists.

The consumer price index soared to 3.8 per cent at the end of last year, up from November’s annual pace of 3.4 per cent.

Treasury’s Mid-Year Economic and Fiscal Outlook as recently as December was forecasting a 3.75 per cent headline inflation rate for 2025-26.

Just nine months earlier, in the March Budget, it was forecasting a 3 per cent inflation rate for this financial year.

The major banks have also underestimated the inflation problem with Westpac as recently as October forecasting a 2.9 per cent inflation rate for June 2026.

They updated their forecasts last month to have headline inflation running at 3.2 per cent by mid-year.

Westpac, like the Commonwealth Bank and ANZ, says this month’s hike will be the last for 2026.

NAB sees another increase in May that would take the RBA cash rate to 4.1 per cent, back to where it was in May last year before the second of three rate cuts in 2025.