Kate Chaney (Curtin, Independent) Share this | Hansard source

Last week the Reserve Bank raised the official cash rate from 3.6 to 3.85 per cent in response to rising inflation. Raising interest rates makes borrowing money more expensive, so businesses and households spend less. This is a blunt instrument that the RBA uses to cool the economy. This is bad news for many Australians, because higher interest rates directly increase the cost of living, particularly for households with mortgages, small businesses carrying debt and rents whose landlords have to pass on their increased mortgage costs. For millions of people it means higher repayments, less disposable income and tougher decisions about everyday spending.

Raising interest rates works largely by hurting poorer and more vulnerable households first. Wealthier households without mortgages or living on savings can continue spending, while those already living on the edge are forced to cut back on spending, which is ultimately how higher rates slow the economy. Annual inflation is now at 3.8 per cent, above the RBA's formal target range of two to three per cent. Inflation matters because it erodes our standard of living, particularly for households whose incomes don't keep pace with prices. Right now, there's ongoing political debate about what has caused the recent inflation pressures. The Treasurer points to strong private sector demand—that is, households and businesses spending more. The opposition points to high levels of public or government spending. In reality, both played a role, and finger pointing does little to solve the problem for your average Australian.

What matters now is what we do about it, and it's time for some serious ambition on economic reform. The government can put downward pressure on inflation in a few different ways. One response is reducing government spending. Spending is at its highest level since 1988 other than during the pandemic, and the government needs to reinstate fiscal rules and make ministers and departments more accountable for the blowouts in budget measures. Another approach is improving the efficiency of government spending. Government should be focused on delivering government services more efficiently so we get better bang for our buck and there's an opportunity to do this with our climate and industry policy. In the absence of a market based carbon price, support for decarbonisation relies on ad hoc subsidies and grant programs that often lack transparency, encourage rent seeking and fail to drive economy-wide adjustment. A carbon price combined with targeted industry policies such as R&D incentives and workforce transition support would provide a far more efficient framework, replacing piecemeal interventions with clear economy-wide signals.

The most important way to address inflation sustainably is lifting productivity, or working out how to make more goods and services with fewer resources. With high productivity, increased spending leads to more output. With low productivity, it leads to higher prices. It's like the speed limit on the economy. Productivity is also the main driver of rising living standards over generations. We live better than people did a century ago not because we work harder but because we produce far more with the same amount of effort. As Paul Krugman famously said, 'Productivity isn't everything, but in the long run it's almost everything.' That's why it's concerning that the RBA has downgraded its medium term productivity growth assumption to just 0.7 per cent per year. In the nineties and the early 2000s, growth above two per cent was common and supported rising wages and living standards. Today, a lower productivity ceiling weighs directly on incomes and opportunity. Improving productivity is difficult, but we've had a productivity roundtable that's not yet delivered results, and the Productivity Commission released a five-year report in 2023 that included recommendations on how to improve productivity in education, migration, workplace relations, technology, business dynamism, the Public Service and decarbonisation. These remain good ideas.

Reducing unnecessary regulation is an example that's critical. A typical small business must comply with thousands of pages of federal, state and local rules. Regulations are easy to add but hard to remove, and, over time, they accumulate. Our complicated workplace relations regime is a prime example of this. In the construction industry, productivity has gone down over the last 30 years. The government should be ambitiously simplifying our workplace relations system to improve productivity. Ambitious tax reform also matters. Australia relies heavily on taxing labour income even as the working age population shrinks. Shifting the tax base away from penalising work and investment would support productivity and long-term fiscal sustainability.

Australia's inflation challenge cannot be solved by interest rates alone. Only by expanding the economy's productive capacity can we stabilise inflation. (Time expired)

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