The spending Bullock won't name: where the inflation culprit really hides
The RBA has pointed at government spending as an inflation driver — but won't say which spending, leaving mortgage holders to pay for a debate nobody is resolving.
Michele Bullock told a parliamentary committee this year what central bankers typically say when the politics gets hot: government spending is part of the problem, but not the whole problem, and it is not her place to tell the government what to cut. It is a defensible position. It is also, taken at face value, close to useless for anyone trying to understand what is actually driving Australian inflation and what could actually fix it.
The inflation numbers themselves are not in dispute. After the RBA cut rates twice in 2025, in February and May, inflation sat at a manageable 2.1% by June. Then it jumped to 3.8% by December, well above the 2.5% target, pushing the RBA into a rate rise in early 2026. That reversal, a cut and a hike within twelve months, is unusual enough to demand explanation. Bullock offered several: low unemployment, rising real incomes, falling interest rates feeding back into demand, tax cuts. Government spending figured in the list, but only as one item among many.
None of that is wrong. Demand-side inflation can come from multiple directions at once, and attributing it to a single cause is the kind of clean story that makes for good headlines but poor economics. The RBA's own rate decisions carry distributional consequences that fall unevenly on Australians, and the relationship between fiscal policy and inflationary pressure is not simple. A dollar of infrastructure spending lands differently than a dollar of income support or a dollar of public sector wages. Aggregate figures hide as much as they reveal.
Naming the problem without naming the programs creates a vacuum that politics fills
That is precisely why Bullock's reticence is a problem. "Government spending contributes to aggregate demand" is technically accurate and analytically empty. It tells us nothing about which parts of the budget are actually running hot, nothing about which programs are adding to demand beyond what the economy can absorb, and nothing about whether the trade-offs embedded in current spending decisions are the right ones to make. The RBA's position, in effect, is that fiscal policy is inflationary but it cannot say which fiscal policy, and it is not its job to say. The public is left with a verdict without a case.
This matters because the policy debate is not being conducted in a vacuum. Opposition figures have used Bullock's comments to argue for across-the-board spending restraint. The government has defended its programs on social grounds. Both sides are operating largely without the granular breakdown that would allow anyone to evaluate whether either argument is grounded. When the RBA points at government spending in aggregate, it creates political cover for both the attack and the defence, without resolving anything.
When the RBA points at government spending in aggregate, it creates political cover for both the attack and the defence, without resolving anything.
The federal budget does contain detailed line items, and the government publishes mid-year updates with updated expenditure estimates. But the connection between those figures and the RBA's inflation modelling is not made explicit to the public, and Bullock has not drawn it. This is not unique to Australia; central banks everywhere prefer to influence fiscal policy through temperature rather than prescription. But the consequence here is a public debate conducted at a level of abstraction that prevents accountability on either side.
Not all spending creates equal inflationary pressure — and that distinction is doing no work in the public debate
If the inflationary pressure is coming primarily from transfer payments boosting household consumption, that is a different policy question than if it is coming from capital expenditure on infrastructure, or from public sector wages, or from energy subsidies that happen to be suppressing the measured CPI number while pushing demand elsewhere. Each of these mechanisms has different implications for what restraint, if any, would actually reduce inflation rather than simply reduce spending. The RBA's communications, however carefully worded, do not help the public navigate that distinction.
What we are left with is a central bank that has raised borrowing costs for every Australian household with a mortgage, that has identified fiscal policy as a contributing cause, and that has declined to be more specific than that. That may be appropriate institutional caution. It may be that the RBA's own models do not yield that level of specificity with confidence. Either way, the gap it leaves is being filled by assertion, and the interest rate is the thing that is doing the actual work, falling on households regardless of whether they had anything to do with the spending that prompted it.
Frequently Asked Questions
Why did Australian interest rates go up again after being cut in 2025?
Inflation fell to 2.1% by mid-2025 after two RBA rate cuts, but then surged to 3.8% by December — well above the 2.5% target. The RBA responded by raising the cash rate to 3.85% in early 2026, citing rising real incomes, low unemployment, and government spending as contributing demand pressures. The rate was increased again in September and is currently at 4.60% - the highest in 15 years.
Is government spending causing inflation in Australia?
RBA Governor Michele Bullock has acknowledged that government spending is contributing to inflationary pressure, but has declined to identify which programs or categories of spending are responsible. The distinction matters: infrastructure spending, transfer payments, and energy subsidies each affect demand and measured inflation in different ways.
Why won't the RBA say which government spending is inflationary?
Central banks typically resist prescribing specific fiscal cuts, preferring to signal concern about overall demand rather than name programs. Bullock has described this as outside her institutional role. Critics argue the result is a public debate driven by political assertion rather than evidence, with mortgage holders bearing the cost of the ambiguity.
Do energy subsidies affect Australia's inflation figures?
Energy subsidies can suppress the measured CPI figure while pushing demand into other parts of the economy — meaning the headline inflation number may understate the underlying demand pressure the RBA is trying to contain. This makes targeting the official rate more difficult than it appears.
What is the RBA's inflation target and has Australia breached it?
The RBA targets inflation of 2–3%, with a midpoint of 2.5%. Inflation reached 3.8% by December 2025, clearly above that band, prompting a rate rise in early 2026 — reversing cuts made only months earlier.