Senate Economics Legislation Committee, , 2:55:10 to 3:00:14
Examination of how federal and state government spending contributes to aggregate demand and its subsequent role in driving domestic inflationary pressures.
Topics: Government spending, Procurement
Speakers: Michele Bullock, Hon Jane Hume, Dr Sarah Hunter, Unknown Speaker
Okay. Thank you. I I last month uh when the Reserve Bank appeared before the House Economics Committee, you were asked specifically about the impact of government spending on inflation and also whether the RBA had modeled the impact of that. In that committee, you answered that the RBA had not modelled the impact, but subsequently, a freedom of information request revealed that you had modeled scenarios which included the impact of government spending on inflation. Now the RBA secretary has provided a letter to the House Economics Committee correcting the record. It stated while the composition of a specific spending proposal matters in general, lower government spending would reduce aggregate demand unless it was offset by stronger spending elsewhere. If this eased capacity pressures, it would also tend to reduce inflationary pressures. So, Governor, can I ask you then please to confirm that documented RBA position that in general lower government spending would reduce aggregate demand and tend to reduce inflation?
I I confirm that's what it says, but it goes on to say, however, the size and timing of the effect cannot be estimated from the headline figure alone. Estimating the effect of a specific proposal would require further detail about what spending would be reduced, when the reduction would occur, and how other parts of the economy might respond. So I stand by that, we stand by that. But back to the point, we were asked had we modeled and would we model a 2% reduction in federal government spending? The answer is no, we haven't modeled that. What the FOI request you are referring to when we refer to in this letter, it was asking the question, a slightly different question. It was asking the question, what would our models tell us about changes in particular types of government spending and how that might impact the economy? That's a different question. Um, and it's not a scenario basically saying what happens to inflation if we just have a blanket uh cut of 2% in federal government spending.
Can I ask uh again on this issue? Um, Ms. Hunter on on Sunday night on 60 minutes, in response to a question about the role of government spending in driving inflation. Ms. Hunter said government spending is definitely part of the picture. Government uh Governor, do you agree that government spending is definitely a factor in Australia's high inflation rate?
I've I've said this a number of times. Part of the inflation problem is that demand is greater than the ability of the economy to supply. Demand is made up of demand from uh government and the private sector. So I've said this a number of times, yes. To the extent that it is in contributing to aggregate demand, and aggregate demand is above supply, then it's contributing to that. But it it's I've said this a number of times, and I think that's exactly what Sarah said on Sunday night.
Can I ask you? Yeah, uh to clarify um just so that everyone's clear on what my answer to the question was that was uh shown on Sunday evening. It was a question about the role uh whether or not government had role to play in the economy overall. My answer to that question was that yes, uh, clearly definitely does have a role to play in the economy overall. Um I we've said that a number of times. I don't think I've said anything uh that's inconsistent with what we've said before.
No, indeed, I think there is some uh some consistency uh also from former RBA Governor Phil Lowe, who said that government spending has been adding to demand progressively over time, and that's putting upward pressure on inflation. Uh Governor, do you agree with your immediate predecessors assessment? This was only at the end of last month.
I'm only going to say what I said before, which is that government uh spending, federal and state, I have to say here, not just federal, all contributes to aggregate demand in some way, whether it be through uh infrastructure projects, services they have to provide and so on, all things in which governments uh the um public expect governments to That contributes to aggregate demand, and to the extent that aggregate demand is above aggregate supply, it contributes to that excess demand. Yes. Now, um, as I have also said repeatedly, um monetary policy is independent, and fiscal policy is a matter for the Parliament and the government. It is not for the central bank to tell the government what to do with their spending and particularly how to um how to direct their spending. It is not for us to do so.