Jacob Vadakkedathu is the Canberra Liberals Senate candidate.
Australia is grappling with a sluggish economy characterised by high inflation and high interest rates, creating a challenging landscape for businesses and households alike. The confluence of these factors is stifling growth and eroding consumer confidence, necessitating a nuanced approach from policymakers to navigate this economic quagmire.
Inflation, a persistent rise in prices, has been particularly stubborn in recent months. Its origins are multifaceted, stemming from global supply chain disruptions, elevated energy costs, and the lingering effects of pandemic-induced fiscal stimulus. The impact on Australian households is palpable; everyday goods and services are becoming more expensive, squeezing disposable incomes and reducing purchasing power. This, in turn, dampens consumer spending – a critical driver of economic growth.
High inflation is typically countered by increasing interest rates, a strategy currently employed by the Reserve Bank of Australia (RBA). By raising rates, the RBA aims to temper demand and bring inflation back within target ranges. However, this approach comes with significant trade-offs. Higher interest rates increase the cost of borrowing for businesses and consumers. For households, this means larger mortgage repayments and higher credit card interest, which can strain family budgets. For businesses, especially small and medium-sized enterprises, the costlier capital can hinder investment and expansion plans, potentially leading to layoffs or reduced hiring.
The combined effect of these dynamics is a vicious cycle: high inflation reduces purchasing power, leading to decreased consumer spending; in response, higher interest rates aim to control inflation but simultaneously curb economic activity. The Australian economy finds itself in a precarious position, with growth prospects dimming as inflation remains persistently high and interest rates climb.
Australia is facing significant Federal budget deficits estimated at $122 billion over the next four years despite substantial windfalls from export and increased commodity prices. It is crucial to achieve a structural surplus or at least a structural balance in the budget rather than relying on these windfall gains. Instead of restoring budget discipline, Labor has added $315 billion in new spending at a time when restraint is needed. Spending as a proportion of GDP in 2024-25 is projected to be the highest since 1987, excluding the COVID-19 pandemic years, with total expenses expected to be 26.6 per cent of GDP. The country’s net debt is projected to increase by 40 per cent, from $500 billion to $700 billion in the forward estimates. The Albanese and State and Territory Labor Governments are doing little to tackle inflation. Housing costs are up by 12 per cent, rates by 12 per cent, electricity by 18 per cent, gas by 25 per cent, and food by 10 per cent.
The Federal Labor Government will have collected nearly a quarter of a trillion dollars more in receipts over 2023-24 and the following two years than forecast by former Treasurer Josh Frydenberg. This increase is mainly driven by a post-pandemic employment boom and spiking commodity prices. However, as the Labor Government is confronted by a cost-of-living crisis driven by high inflation, it has embarked on a large increase in Government spending using almost two-thirds of this massive revenue increase generated by the windfall gains.
Despite receipts growing faster than payments, the anticipated rise in spending raises concerns that the Government’s fiscal policy might not be sufficiently supporting monetary policy in curbing inflation.
Against this backdrop, an incoming Coalition Government has pledged to tackle the inflation crisis by “getting back to basics”. Central to their strategy is greater restraint on Government spending. This fiscal conservatism is rooted in the belief that reducing the deficit will help temper inflationary pressures. By scaling back on Government expenditure, the Coalition aims to reduce the amount of money circulating in the economy, thereby cooling demand and helping to stabilise prices.
In addition to fiscal restraint, the Coalition emphasizes the need for structural reforms to enhance productivity and competitiveness. This includes investments in infrastructure, technology, and education to build a more resilient economy. By fostering an environment conducive to innovation and entrepreneurship, a Coalition Government hopes to stimulate new industries and job creation, leveraging Australia’s rich natural resources and strategic location.
Furthermore, the Coalition’s plan includes reducing red tape and regulatory burdens on businesses, aiming to encourage private sector investment and growth. By creating a more business-friendly environment, the Government seeks to stimulate economic activity and job creation, thereby fostering a more dynamic and robust economy.
Australian economy is at a crossroads, beset by the dual challenges of high inflation and high interest rates. An incoming Coalition Government’s strategy to address this involves restrained Government spending to reduce inflationary pressures and implementing structural reforms to boost long-term growth. While this approach carries certain risks, particularly in terms of social welfare, it reflects a commitment to fiscal discipline and economic resilience. Navigating this terrain will require careful balancing to ensure that any immediate hardships are mitigated without sacrificing long-term growth prospects.
