Essay by Eric Worrall
“… the Australian economy has also been operating beyond its sustainable capacity …”
Australian economy among world’s worst placed to weather Middle East shock: HSBC
The news: HSBC chief economist Paul Bloxham has warned that Australia is in one of the worst spots globally to deal with the economic fall out of the US-Iran conflict.
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He said this week’s first quarter inflation figures are expected to confirm that headline and trimmed mean CPI were “well above” the 2.5% target even before the full impact on the fuel price shock appeared.
“At the same time, the Australian economy has also been operating beyond its sustainable capacity and the jobs market has been tight,” he said.
“In our view, this combination makes Australia is one of the least well-placed developed economies to deal with the inflation shock that is arriving.”
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He said the “slow road” taken by the RBA to get inflation back to target, compared to the higher and quicker rate rises overseas, means the economy is “now not very well placed to deal with the next shock”.
Read more: https://www.capitalbrief.com/briefing/australian-economy-among-worlds-worst-placed-to-weather-middle-east-shock-hsbc-dcfceedb-12bc-4804-900e-8af282b0eac5/
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Why is the Australian economy in such a precarious situation?
Lowe’s stark warning to Labor on spending, growth
Former Reserve Bank of Australia governor Philip Lowe has blasted the federal government’s cost-of-living handouts and inaction on boosting the overall size of the economy, warning it has condemned the nation to high interest rates, low wage growth and a stagnation in living standards.
Speaking in his new role as chair of the ASX’s corporate governance advisory body, Lowe said government spending was making the economic challenge worse but said the bigger issue was federal Labor’s failure to act on productivity and increase growth.
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“There’s been endless reports, we know … we tax income and wealth generation too highly and consumption too lightly. The way we tax land is all screwed up, on education we’re going backwards, our energy system is high-cost and unreliable, we haven’t planned the growth in the housing stock for the growth in the population, and skills are going backwards in some areas.”
Read more: https://www.afr.com/policy/economy/lowe-s-stark-warning-to-labor-on-spending-growth-20260217-p5o2zx
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Federal treasurer Jim Chalmers suggested Philip Lowe’s criticism was payback for Chalmers not re-appointing him as Reserve Bank governor. But it’s not just Philip Lowe saying something is very wrong with the Australian economy.
The HSBC critique (first quoted article) suggests the Aussie economy was already overheated before the Iran War oil shock. So what was overheating the economy? From the Aussie government website;
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In its most general sense, inflation is the rate at which prices change over a given time period. According to the RBA, the main causes of inflation fall into three broad categories: demand-pull, cost-push, and inflation expectations. Government spending that provides additional money to people and organisations can in turn mean the money is used to purchase more goods and services—that is, adding to demand and increasing prices—the ‘demand-pull’ mechanism. Economist Chris Richardson has estimated that for every $7 billion in additional government spending, the RBA would need to lift the cash rate 0.25 of a percentage point higher than otherwise.
Read more: https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/Research/Budget_Review/2024-25/GovernmentSpendingInflation
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I’m not suggesting government expenditure is the only factor – our lack of preparedness for the Iran War crisis and a consequent surge in fuel prices is a significant factor. But the impact of government expenditure is not negligible.
According to economist Chris Richardson, cited on the Australian Government website page above, every $7 billion increase in government expenditure in Australia generates a 0.25% increase in interest rates. That’s quite an impact. Unfortunately the original document written by Chris Richardson has disappeared, but going by what wasn’t accidentally deleted from the Aussie federal government website, that’s quite a boost. [note this article by AFR puts the number at $7.5 billion / 0.25%].
I haven’t found the original paper by Chris Richardson, but his website is available here.
So what is the government spending our money on? The answer is plenty – but there is one set of expenditures in particular which caught my eye. From the government’s 2025-2026 budget document;
Budget 2025-2026
Economy
Building a stronger economy…
Cleaner, cheaper energy
The Government is unlocking $8 billion of additional investment in renewable energy and low emissions technologies through a $2 billion expansion of the Clean Energy Finance Corporation. This is in addition to $36.9 million to enhance the use of existing grid infrastructure and a $10 million Accelerated Connections Fund to reduce grid bottlenecks.
Unlocking private investment in priority areas
The Government has legislated $13.7 billion in hydrogen and critical minerals production tax incentives and has allocated $1.5 billion in support for priority areas through the Future Made in Australia Innovation Fund, including:
- $750 million for green metals
- $500 million for clean energy technology manufacturing capabilities
- $250 million for low carbon liquid fuels.
Support for green metals
The $2 billion Green Aluminium Production Credit will support Australian aluminium smelters to transition to renewable energy, and the $1 billion Green Iron Investment Fund will accelerate the development of this new industry.
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Delivering transport infrastructure
This Budget provides $17.1 billion over ten years for road and rail projects to improve the productivity and resilience, liveability and sustainability of our cities, regions and communities. This continues to refocus the Government’s over $120 billion 10‑year infrastructure investment pipeline on nationally significant projects.
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Read more: https://budget.gov.au/content/06-economy.htm
The true amount of green expenditure is probably significantly higher than the $24 billion the government has admitted spending on green projects. Some of the $120 billion earmarked for “critical infrastructure” is probably green infrastructure expenditure.
But let’s stick with the obvious. How much would eliminating $24 billion of obvious green boondoggles help?
Applying economist Chris Richardson’s $7 billion additional government expenditure = 0.25% interest rate rule (see above), cutting that $24 billion of useless green expenditure could result in a 1% drop in mortgage rates.
6% mortgage interest rates could become 5% mortgage interest rates.
The impact of such a reduction would be significant. According to 9News, a million Aussies are struggling to pay their mortgage. Reducing mortgage rates from 6% to 5% would be a 17% reduction in monthly mortgage interest payments for a family on the financial brink. If a family is paying $3000 / month on an interest only mortgage, reducing the mortgage rate from 6% to 5% would reduce monthly repayments to $2500. That extra $500 / month saving might mean the difference between keeping the house or being evicted by the bank.
It’s OK federal treasurer Jim Chalmers, you don’t have to thank me for finding $24 billion dollars of cost savings which could be eliminated from the federal budget. Cutting that useless green expenditure to save distressed Aussie families from financial disaster will be thanks enough.
