Bullock says slower public spending growth could ease inflationary pressures
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The news: RBA governor Michele Bullock told a parliamentary committee that a slower rate of public spending would contribute to narrowing the gap between surplus demand and supply, as she faced a torrent of questions on the inflationary forces underpinning this week’s interest rate rise.
The context: After deflecting multiple questions probing the impact of public spending on inflation, Governor Bullock conceded that technically a slowdown in public spending growth could help alleviate inflationary pressures.
“Then if both public and private reduce growth rates, that will help to close the gap between aggregate demand and aggregate supply. What we've got to do is close the gap. We thought we'd closed the gap. We now think we haven't closed the gap, so you need slower growth in aggregate demand, and both public and private could contribute to that,” Bullock said.
She also noted that some elements of fiscal policy that make direct payments or transfers to consumers to spend, such as electricity rebates, show up in private demand figures rather than public demand.
Bullock also reiterated the RBA's view that the recent uptick in inflation has been driven by higher than expected private investment – particularly household consumption and business investment – and remained ambivalent on the impact of higher government spending.
The Financial Review previously reported a $57 billion blowout in budget deficit forecasts over seven years had occurred in the time between the 2025-26 budget and the mid-year update amid a huge upward revision in expected spending.
In Bullock’s opening statement she stressed that there is a need to dampen demand growth if the supply side cannot expand more quickly through improved productivity growth.
“Faster productivity growth allows for stronger growth in incomes and spending without the emergence of inflationary pressures,” Bullock said.
Separately, she also flagged that the central bank has now addressed 41 of the 51 recommendations laid out in the RBA review released in April 2023.
The bank will also “implement two further recommendations in 2026 the publication of a framework for additional monetary policy tools and convening of an external expert advisory group on monetary policy”.
The payments system board will also publish the findings of its review of surcharging and merchant card payment costs by the end of March 2026.
A consultation on broader payments systems including three party card schemes, mobile wallets, buy now pay later providers and eCommerce platforms will take place in mid-2026.
