Kochie's Letter to RBA: Is Government Spending Fueling Inflation?

Former Sunrise host David Koch has penned an open letter to Reserve Bank of Australia (RBA) governor Michele Bullock, urging her to clarify the government's contribution to Australia's inflation problem. This comes as major banks like Commonwealth Bank, Westpac, and ANZ warn mortgage holders of impending interest rate increases.

Financial markets are currently pricing in a cash rate increase to 4.6 percent by September 29, with further rises anticipated in early 2025 and potentially later in 2027. Koch argues that households, who are facing the brunt of these potential hikes, are not the primary drivers of the current inflation.

"There's an increasing likelihood a great many Australians are likely to be handed a bill they did not run up," Koch stated in his letter. He pointed to the June quarter national accounts, which showed economic growth of 0.4 percent, exceeding forecasts. Koch contends that this growth has been fueled by federal and state government spending, public sector expansion, and wage increases within the public sector, rather than by household consumption.

Koch highlighted that household spending increased by only 0.4 percent in the June quarter, while the household saving ratio rose to 6.5 percent. He also noted that unemployment had climbed to 4.5 percent, consumer sentiment was declining, and business conditions had turned negative.

"So who did the growing? Government, and not by a little," Koch asserted, citing figures that suggest Commonwealth government spending has reached 26.8 percent of GDP, its highest level since 1986 outside of the pandemic period. He also criticized state government spending and public sector growth.

According to Koch, data from the Australian Bureau of Statistics indicates that prices influenced by government actions—such as childcare, education, healthcare, utilities, and insurance—have risen faster than market-driven prices. "In other words, some of the stickiest price pressure isn't coming from shoppers splurging… it's coming from prices governments set, subsidise, regulate or index," he said. "Governor, that last point deserves emphasis. A meaningful slice of the inflation your board is trying to contain is not being generated in a shopping centre. It is being set in a cabinet room."

Koch further argued that petrol price shocks are already a significant burden on households, and an interest rate rise would exacerbate this without addressing the root cause. He pointed out that Australians have already absorbed three rate rises this year, pushing interest payments to 5.8 percent of household gross income, a higher burden than during the 1990s mortgage rate peak.

He proposed four steps for the RBA to consider: publishing an estimate of how much of the cash rate is attributable to government spending within its monetary policy statements, showing the hypothetical rate had government spending grown in line with GDP, securing a fiscal statement from federal and state treasurers committing to a spending path aligned with inflation targets, and explaining the mortgage repayment impact of any rate rise.

Expectations of a rate increase were intensified by stronger-than-expected inflation data and recent comments from RBA Governor Michele Bullock. AMP deputy chief economist Diana Mousina suggested Bullock's recent parliamentary appearance indicated the RBA was preparing for a rate hike.

Koch concluded by asking that if another increase is necessary, the RBA should clearly identify the factors driving the decision. "If the board must move on September 29, please do Australians the courtesy of naming who forced your hand," he urged. "A rate rise won't pump a single extra barrel, or fix a thing in the Middle East. It simply hits the same kitchen table twice."