Senate Economics Legislation Committee, , 0:00 to 29:20
The Reserve Bank of Australia discusses the impact of inflation and government spending on monetary policy decisions.
Topics: Government spending, Parliamentary privilege, Agricultural productivity
Speakers: Michele Bullock, Hon Jane Hume, Lisa Darmanin, Dr Christopher Kent, Unknown Speaker
>> We get going. All right. Uh I declare open this hearing of the Senate Estimates, Senate Economic Legislation Committee into the 202526 additional budget estimates. I begin by acknowledging the traditional custodians on the land on which we meet today and pay my respects to their elders past and present. I extend that respect to Aboriginal and Toouristra Islander peoples here today. The committee is due to report to the Senate on Tuesday 31st of March 2026. Questions on notice. The committee has set 20th of the 20th of February 2026 is the date by which senators are to submit written questions on notice and 10 April 2026 is the date for the return of answers to questions taken on notice for today's proceedings. The committee's proceedings today will begin with the Reserve Bank of Australia. The committee will be conducting today's hearings via video teleconference and in person. Understanding order 26. The committee must take all evidence in public session. This includes answers to questions on notice. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence. The Senate has endorsed the following test of relevance of questions at estimates hearings. Any questions going to the operations or financial positions of the departments and agencies which seeking funds in estimates are relevant questions for the purpose of estimates hearings. I remind officers that the Senate has resolved that there are no areas in connection with the expenditure of public funds where any person has a discretion to withhold details or explanations from the Parliament or its committees unless the Parliament has expressly provided otherwise. The Senate has resolved also that an officer of a Department of the Commonwealth shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution does not um well does not preclude questions asking for explanations of policy or factual questions about when and how policies were adopted. Witnesses are reminded of the Senate order specifying the process by which a claim of p public interest immunity should be raised. I incorporate the public immunity statement into the handard. I remind senators of their obligations under the behavior code for Australian parliamentarians to treat witnesses with dignities, dignity, courtesy, fairness, and respect. An officer called to answer a question for the first time should state their full name and the capacity in which they appear. I remind committee members and witnesses who are appearing via video conference and who are not speaking to mute their microphones. The committee welcomes the Reserve Bank of Australia and its representatives, Governor Ms. Michelle Bulock and Assistant Governor Dr. Christopher Kent. Um, would you like to make an opening statement, Miss Bullock? No. No. Okay. So, we will go straight to questions then. Um, I will kick off quickly. Um, we met not very long ago, uh, December. Um, wondered if perhaps we could kick off with, um, I guess some of the sort of key points around what what has really changed since the last time we spoke um, in December.
>> So, a few things have changed. Um you [clears throat] recall when we last spoke in September, we'd highlighted that we'd had um a run of news that was really all suggesting that inflation risks on the upside were increasing and we were seeing um demand come in a bit stronger than expected. We were seeing the labor market holding up a bit stronger than expected. Inflation numbers were coming in a bit higher than expected. the world economy was not um uh was was actually recovered a lot more than people thought it would. There was a lot of pessimism earlier in the year about that. So all of these things um were adding to uh inflationary pressures if you like and um as you will see um news from December to now has just reinforced all of that and the board took the view uh at its meeting last week that inflation running at something with a three in front of it was not acceptable. it's not in the range and it's not forecast to get back into the range for another couple of years. Um and so the appropriate response um to these changing circumstances was to
>> And can you talk a bit about um private demand and how that has changed um in your observation since we last spoke? We did talk that I remember asking a little
bit about that last time then and how
it's what's happened since then.
>> Yes. So private demand um did come in stronger than expected. Um it's both consumption and investment. Now some of that investment uh is in lumpy things like uh data centers for example um which is one people have highlighted. Um it's lumpy. It's also quite important. Um so it doesn't necessarily add to pressure on domestic production. Uh but nevertheless it was indicative uh along with the consumption indicators that people were getting out and consuming it. It's a little bit difficult because um seasonal patterns have changed a bit particularly with the um advent of Black Friday sales and those sorts of things. So there there is a sense in which we've got to be a little bit careful because some of it's bringing consumption forward to take advantage of those sorts of sales. So we're alert to that. >> But notwithstanding that we did see more strength in consumption than we were expecting. And that's reflecting really the recovery in real incomes over the last year. I think the um real disposable household incomes have been rising and that's being reflected in uh consumption. So consumption investment have been uh surprised us on the upside and we think that's partly what's driving uh inflation. The other point I would make is that the board has uh reassessed and the staff have reassessed um where we think we are in terms of balancing the economy. We thought we were close to balance between supply and demand. We've reassessed that and you will see in our recent statement on monetary policy. We now assess that actually we are in a situation of excess demand and the labor market remains tight and these two things are keeping
pressure on inflation. Mhm. Um so just in terms of um the kind of um investment comments you made then um uh things can be a bit lumpy. Um what would you say um about the energy transition in terms of the recent um pick up in private investment outside of data centers?
>> Well, that's that's also partly um I think being reflected in the investment figures. Um again that is also lumpy and it's also import intensive. >> Mhm. >> Um but uh that's certainly part of uh the explanation.
>> Yeah. And maybe just very quickly um just a couple of comments from you about um the everpresent geopolitical instability and um political uncertainty. Um I guess you I mean you said that and I've heard this commentary already that um the global um outlook was better than what was anticipated. um um what are you seeing now in terms of the uh impact on the Australian economy and perhaps maybe if you could also make a comment um uh independent of tariffs around um some of the risks to the Chinese economy and also um any thoughts around the recent outcome of the Japanese election. >> Sorry. and then that that will be my last.
>> What I'm going to do is I'm going to talk a little bit about it and then I'm going to pass to Chris Kent to talk a little bit about financial markets because I think that's an important part of the story. >> Um yes, geopolitical um risks are heightened. When you go back to sort of May, I guess last year there was a lot of pessimism about the world economy. Everyone was marking down their forecasts for the world economy. Um there was and that was based on the fact that there were massive tariffs being threatened. There was concerns that not only would the US impose tariffs but also other countries would retaliate with their own tariffs. Um everyone revised down their forecasts for growth. Um and uh there was concerns that the global trading system basically would would freeze up. None of that ended up happening. And in fact, if you look now at everyone's forecast, they're not only revised back up, but they're they're above where they were prior to being revised down. And I think a couple of things have happened. Um, first of all, that the tariffs haven't turned out to be as bad as everyone thought they would be. They are certainly higher. Um, the US tariffs are certainly higher than they were prior to the um, April announcements. Um but the effective tariff rate is actually a little bit lower than that because there's lots of exemptions. There's um uh so that that's partly it. Second thing is that the global trading system has actually responded pretty quickly and effectively. Um, Chinese exports to the US are down, but they're they've increased in other areas. And the and in particular, the AI boom has really driven um great exports for um the Asian countries, East Asian countries. I'm thinking of Korea and Taiwan in particular. And that's that's driven really strong growth there. So that's been really helpful for us. So that's that. However, there is this constant uncertainty and geopolitical uh sitting there. Um, and I think where you might think that might start to bite as the financial markets. So, I'm going to let Chris say a few things about that.
I think that's right. And we've seen from time to time when geopolitical tensions of one sort or another have sort of spiked um that you have seen some response of financial markets. I think overall though that's not been that enduring partly because uh you know threats for example of the US uh taking over Greenland have been stepped back. Um threats of additional tariffs from the US on Europe because of that dispute over Greenland have been pulled back. So markets have been disrupted for a time but then pulled back partly because the geopolitical tensions have eased. I think the the thing that's surprising in some ways though but a reflection of what the governor was saying in terms of the global economy has been better is financial markets uh valuations have been um remain quite elevated. So equity prices for example and generally uh people aren't asking when they're investing for high returns uh in terms of um what another way of saying that is that they're happy with pretty low returns for the risk that they might be taking. Um having said that there are some effects uh longer term we're seeing term premier. So when governments borrow at it very long term whether it's in Japan or in the US particularly um they're paying a little bit of a premium that they weren't paying in the past and that's because of concerns about the sustainability of very large deficits and debt >> and that comes around to the Japanese election. There has been concern that that's going to push up uh that's going to be a bit stimulatory which will be inflationary um and pushing up the cost of them borrowing. Uh but all in all financial markets sort of taking it in their stride uh and financial conditions uh quite favorable including for Australian companies and Australian banks raising funding offshore.
>> Great. Thank you so much. Um I will pass
issue on global volatility, obviously if one of your measures for for global volatility is the VIX index, it does seem to have come back down since the beginning of the year. That's right. So, which would suggest then that uh domestic factors are more at play in decisions that the board are making now than international factors.
>> I think that's probably fair to say at the moment the focus uh for the board has been on domestic inflation. Um and um in previous um through the second half of last year, increasingly from September on, not only us, but the markets were starting to focus on the domestic factors which were suggesting inflationary pressures were rising. And that that happened progressively. It didn't uh it didn't happen all of a sudden. It had been happening progressively since September as more and more data became available. >> Not just us, we were changing our view, but the market was also changing its view. So I think that's important to
>> I think that's right. But global developments have had an effect on our domestic financial conditions as I just suggested. >> Uh equity prices relatively elevated the cost of borrowing including issuing bonds offshore by banks in Australia for example and and large Australian companies is pretty low and funding's readily available. So that means financial conditions from the global side of things are easier than they otherwise might be.
>> Okay, that's good. Thank you. I I have no intention of prosecuting any of the discussions that went that obviously you appeared before the House Economics Committee last week and we don't want to make you repeat yourselves, but I did notice in your press conference following the most recent rise that you've responded Governor to a question um on four occasions by saying that you don't comment on fiscal policy and that fiscal policy is not your business and that we work with what we've got. I perfectly understand that, but I want to just unpack that a little bit. Um, is that right then to interpret this as the RBA having a general policy of not commenting on fiscal policy?
>> Um, our I don't believe that our job is to tell the government or the parliament what to do with fiscal policy. That is a matter fiscal policy as I've said on a number of occasions is about providing goods and services and infrastructure for the Australian economy. That is the purview of the parliament and the government. It is not the reserve bank's um role to comment on what governments and parliaments should be doing, where they should be spending their money.
>> I I understand exactly the position you're coming from. I suppose uh however, it is also fair to say that fiscal policy can be a driver of inflation, can have a significant impact on inflation. Even if you don't comment about it,
>> it can if um as I said at the um House of Representatives last week, it is a part of aggregate demand. >> Mhm. >> And if you're in a situation like we are at the moment where we have excess demand. Private and public are both part of demand. >> So yes, mathematically it is a fact that that is the case.
>> So I just want to be very clear on this. As a general rule, the RBA does not comment on fiscal policy. But it is wrong to assume that just because the RBA hasn't mentioned fiscal policy or doesn't comment on fiscal policy that it didn't have an effect on your decision because it does contribute to aggregate demand as you say, which is something that the RBA bases its decisions on.
It's if you're talking about our most recent decision, our most recent decision was based on the fact that aggregate demand is we think in excess of the ability of the economy to supply those goods and services. Both public and private uh contribute to that. But what I would say is that if you look at the difference between our forecasts in um November and where where we had inflation coming back into the band and you look at our forecast now where inflation isn't. The key difference there is not fiscal policy. It's pretty much the same as it was in November. The key difference is private demand.
>> Yes. Okay. I I I hear you and I've got some questions about that. I suppose um uh what I'm trying to understand is that the treasurer said that uh fiscal policy was not a factor in the decision that you took. Now clearly that is not the case. Just because you don't talk about just because you don't talk about fiscal policy doesn't mean you endorse fiscal policy. That would be
>> an awkward endorse we don't advocate. we don't do anything
>> thank you
>> for fiscal policy.
>> So it's reasonable to conclude that on the basis of the fact that it wasn't mentioned in the accompanying release that government spending has no bearing on your decision-making. Of course it does because of its contribution to
>> So yes and I've said that before and I have nothing more to add on that.
>> Thank you. I want to just refer you to page 27 of the February statement on monetary policy. I have a copy of that in front of me. I can share one with the committee if you would like, but I'm sure you have one yourself.
>> Page 27.
>> Page 27. Chair, if you'd like a copy there. Uh there is a a line um there's a section of text on the bottom left hand side of that page and I will read it to you. It says budget estimates of the fiscal balance provide a more comprehensive view of developments in fiscal policy than public demand alone. Mhm. >> So my interpretation of that is the role of public demand significantly understates the role of government spending in driving aggregate demand and inflation. Is that right?
>> Um I don't know if I'd add significant in there. What I'd say is that yes, we know that what um public demand is defined as doesn't incorporate other things that governments spend money on. Particularly I'm thinking about um transfers um and that sort of uh job seeker for example or um or uh pensions those sorts of things those sort of things go directly to people and then they can go out and spend them. So there's a sense in which spending uh and transfers can add to private demand because they put money in people's
>> Right. Okay. So that's what I wanted to understand. so that private demand can actually contain a whole bunch of government spending. If government is spending on, and I'm going to pull something out of, you know, out of the air, but if it's childcare subsidies or it's uh electricity subsidies or whatever it might be, that can contribute to private demand.
>> So my understanding and is that those sorts of subsidies are in public demand. They're not in the transfers bucket. Um but yes, the to the extent that people get an electricity subsidy, they don't have to spend that money on electricity. That potentially frees up money for them to spend on other things.
>> So public demand excludes transfers, but when they're spent, they show up in private demand
>> if if they're spent. So it it depends on what people do with the money that they either get in direct transfers or the additional space they get in their income if you like because they're getting other things subsidized. It depends what people do with that and different segments of the community have different marginal propensities to consume. People on lower incomes you might expect would spend most of it because they're often constrained. People on higher incomes may not.
So does it then also um is it then also true that there is a multiplier effect from public demand? When public demand increases there's a multiplier [clears throat] effect that boosts private demand as well.
>> Yes, there are multiplier effects in in in demand. Yes.
>> Okay. All right. So the bottom line is public demand significantly understates the inflationary impact of government spending.
Um I don't know if I'd put it quite like that because um it depends where you are in the cycle in these things. Um if for example you are in a private sector downturn then public demand cyclically you would expect often um so if you've got say unemployment rising in a in a recession or something >> that would usually result in more public spending on unemployment benefits and that's what helps to stabilize
>> okay
>> helps stabilize the economy.
>> Okay I understand that. So, uh, is it then correct to conclude that if if public demand is making a smaller contribution to GDP growth over time, that doesn't in and of itself imply anything definitive about the effect of government spending and the effect that it's having on inflation. Is that right?
It >> it depends. It depends on where you are in the cycle, right? And at the moment, where we are in the cycle is excess demand. If you're in a in a period of excess um supply, which some countries are at the moment in fact, >> then um more demand from the public doesn't necessarily add to inflationary pressures. That's all I'm saying.
>> Well, what about now when the economy is >> well the above its potential
>> at the moment? When the economy is above its potential, when demand is above its potential, both public and private demand are contributing to demand being above supply. I have said this a number of times. I really don't think I have anything more to add.
>> No. Okay. So, all other things being equal, if the budget bottom line deteriorates by um >> well, let me take you a step back. If we talk about just government spending, which you've identified as a more comprehensive measure. The past two financial years 23 24 25 26 the budget bottom line has deteriorated by 1.9 percentage points of GDP and 8 1.8% eight percentage points of which is due to higher spending. Does that mean that if all other things being equal, the budget bottom line deteriorates by 1.9 percentage points of GDP? Does that raise aggregate demand? And then push up inflation.
>> Look, I I really don't think I have anything more to add on this. I have answered this question all last week. I answered the press conference. I are incident at um house reps on multitude of occasions. When we look at what to do with monetary policy, we look at aggregate demand incorporating public and private and we take public as given including public spending and we set interest rates accordingly. As I said at the moment, the total demand we think is above the ability of the economy to supply those and that's why we're exhibiting inflation.
>> Okay. I want to refer you to the statement that you put out uh following the December meeting uh of the monetary policy board. That was really the first time the RBA kind of sounded the alarm about inflation re.
>> No, that no that wasn't. No, we we were sounding the alarm um earlier than that. In fact,
>> when did you when did you sort of sound the alarm that inflation was reemerging? Do you
>> We were sounding the alarm um back in September. Um so uh that's not that's uh certainly in our November uh statement on monetary policy um we were following that up um with concerns about inflationary risks on the upside. So no it's not fair to say that December was the first time we uh we were alert to this.
>> Okay. The reason why I asked is because the release in December does um uh doesn't mention government spending. It doesn't mention public demand.
No,
>> no. Okay. But it mentions private demand or the private sector twice. So it says economic activity continues to recover. Growth in private demand is strengthened driven by both consumption and investment. Now this meeting was held just a few days after the release of the September national accounts. Uh so I presume that the information that was in the national accounts was part of the evidence that the board
>> Yes.
>> considered.
>> Yes.
>> All right. Fantastic. Can I just refer you to some figures for public and private demand that were released as part of the September national accounts? Um, and I'm I'm particularly interested in the the growth rates of each. I have a screenshot of um this is a bit bizarre, but it is in fact the um it's the ABS spreadsheet from national accounts which I can share with you there. you've sort of got to dig quite deep to find this, but I'm sure that the RBA has considered it. So, what was in in the September quarter, was it private demand or public demand that was growing faster?
>> The contribution to GDP growth in the September quarter was predominantly u private.
>> It was private. Okay.
And you can see that if you look at our statement on monetary policy, if you go February, if you go to graph 2.6, it shows you GDP growth with contributions. And um you can see that the contribution of public demand in that quarter was not the predominant contribution to GDP growth. It was private demand.
>> So the contribution and I know that the treasurer has referred to this, but I wasn't necessarily calling on talking about the contribution. I was talking about the growth rate.
>> Sorry, what was that?
>> The growth rate as opposed to the contribution.
>> Well, yes, things everything's growing, but the economy is growing and what we're saying is that what was the main contribution to that growth? So, public demand was growing. Yes. And private demand was growing.
>> But you'd hope that the contribution of private demand was greater. I mean, it's a bigger share of the economy hopefully in a healthy economy.
>> No, it is a bigger share of the economy. private private is is uh going to make
the economy a bigger
>> both of them are growing >> and what surprised us >> in that September quarter release was the strength of the private part that's
what surprised us okay so if public and private demand are growing at the same rate then they're put they're putting a similar sort of proportionate degree of pressure on aggregate demand can we take that as a given
>> well if they're both growing if they're both growing at the same rate and they're both growing above the supply capacity of the economy, then they're both contributing to excess demand. >> I really feel that I am answering the same question over and over again.
>> Well, I I understand that you must feel that, Governor, but it's because we need to be able to understand what it is that's driving a decision. That's obviously Australians are very well you know that Australians are very disappointed to find that there is a there's a 13th interest rate rise under this government that there were people were hanging on your words uh like some sort of internet influencer last week uh which is so this is really important to understand what it is that's driving the decisions that you're having to take and
I've told you what is driving the decision is that we have a situation where there is excess demand. We don't attribute to private and public. The total demand is above the ability of the economy to provide those goods and services. That means there's inflationary pressure and it's taking too long to get inflation back down. I understand people are disappointed with the interest rate rise. But it would not be appropriate in the circumstances we've got to not take that action because inflation is bad for everyone. It is bad particularly for people on lower incomes. Um and it's bad for mortgages as well as for people who own their own homes. It is just high inflation is bad and we've seen that over the past few years. That's what's driving the decision of the board to make sure that we can not let inflation get away and we can bring it back down
>> I couldn't agree with you more, Miss Bullock. And can I tell you that I think from everybody around this table we agree that inflation is bad. The question is what it is that a government can do to help you to make sure that you
don't have to raise interest rates >> And that is for the government to decide. That is for the government to decide. Is not for me to tell the government.
>> Exactly. And that's exactly what we're trying to help them to do.
>> Okay. >> Can I just add the point we made in the um in [clears throat] the statement that you referred to the statement on monetary policy uh about the fiscal balance. There's also the other side of the ledger, the revenue side, >> and most importantly, there's the states. The states make a significant contribution to both uh spending, but also taxation.