Is government spending keeping inflation high?

Updated 3 November 2026 with the latest figures.

On Melbourne Cup Day, 3 November 2026, the Reserve Bank (RBA) lifted the cash rate to 4.85%, its highest since 2008. It was the fifth rise this year, and three of the nine board members voted to hold.

On a $750,000 mortgage, the September rise alone added about $114 a month. Natasha Luscri-Miller had bought a unit months earlier with a 5% deposit. After that hike, she spoke to the ABC.

"How much more are you going to squeeze before you're satisfied?" she asked.

Within hours of the November decision, Opposition Leader Angus Taylor called the inflation home-grown and said Labor had lost control of its spending. Treasurer Jim Chalmers said his budgets were not adding pressure, the ABC reported.

With a mid-year budget update due in December and Labor MPs asking for net savings, the argument now shapes real decisions. So who is right?

Both sides have a piece of it. Government spending is high and makes the RBA's job harder, but the jump to 4.3% came mostly from petrol and the end of power bill rebates.

Confidence: Likely.

Three parts to this: the size of the spending, the cause of the jump, and what a cut would buy.

The level is the Opposition's strongest card. Federal spending sits at 26.8% of GDP in 2026-27, on May budget figures summarised by CommBank economists. Before COVID it averaged 24.8%, according to AMP chief economist Shane Oliver.

Add the states and the gap grows. In February 2026, Oliver put all public demand (what governments spend on services, wages and building) at around 28% of GDP. In the four decades before the pandemic it averaged 22.6%.

That matters because every dollar a government spends competes for the same workers and materials as private buyers. Governor Michele Bullock said on 3 November that the RBA takes public demand as a given and sets rates to suit.

In plain terms, the bigger the government's slice, the higher rates must go to make room. She was blunt about whose call the spending is: "I don't tell them what to do with fiscal policy".

The RBA's new forecasts, released on 3 November, add a warning for 2027. Public demand growth runs at 2.1% through 2026, then jumps to 3.8% in the year to June 2027. The RBA says that path matches the latest state and federal budgets.

Look at what moved this year. Petrol rose 23.6% in the year to September, driven by world oil prices. Electricity rose 12.8%, and the ABS says that was largely due to the end of Commonwealth electricity rebates.

That second number holds the twist. A rebate is government spending. When Canberra stopped paying it, measured inflation went up, because households paid the full bill again.

The national accounts point the same way. In the June quarter, the economy grew 0.4%: private demand added 0.2 of a point and public demand just 0.1, the ABS found.

The RBA's own reasons for the November rise never mention budgets. Its statement lists fuel and commodity prices tied to the Middle East conflict, a tighter economy, AI investment lifting technology prices and rising inflation expectations.

Bullock also said the RBA was not hiking because of oil's direct effect on prices. The worry is that high inflation sticks. The RBA now expects underlying inflation to stay above 3% until the end of 2027.

So would cuts help? A little, and the sums are knowable. Economist Chris Richardson estimated in 2024 that every extra $7 billion of government spending forces the cash rate about 0.25 of a point higher.

Budget decisions in 2025 and 2026 added about $14 billion to spending, ABC political correspondent Clare Armstrong reported on 1 November. On our maths, using Richardson's rule, that is roughly $7 billion a year, or about one rate rise.

Chalmers points the other way. His office says the government has found almost $180 billion in savings since 2022, and that private demand growth nearly tripled while public demand growth halved.

Both claims can be true at once. Savings banked over four years don't cancel spending added this year, and inflation is happening now.

On 3 November Chalmers promised more savings in the mid-year update. Finance Minister Katy Gallagher would not say whether they would add up to net savings.

Oliver makes the strongest case that spending is the main problem. His argument is that slower growth in public spending misses the point. What matters is the level, and a record share of GDP leaves less room for everyone else.

He wants governments to cut the level of spending, so private demand can grow without pushing up prices. The IMF agrees in principle: in February 2026 it urged a fiscal tightening from 2026-27, protecting infrastructure.

The RBA's 2027 forecast gives Oliver fresh support. If public demand speeds up next year as budgets imply, rates may need to stay high for longer.

Where the evidence pushes back is the cause of the 2026 jump. Australia's inflation does stand out: the IMF forecasts 3.9% this year against 3.1% across rich countries. But on the ABS figures, much of the rise came from fuel and energy, which no budget cut reaches.

Nobody has published an up-to-date estimate of how much state and federal spending together adds to inflation. The verdict rests on one assumption: that Richardson's rule of thumb still roughly holds with the cash rate at 4.85%.

Government spending probably holds your interest rate about one rise higher, but petrol and the end of power rebates, not Canberra's budget, pushed inflation to 4.3%. If that's right, borrowers gain if December brings real near-term savings, and people who rely on the services that get cut pay.

This piece draws on 26 sources: four ABS releases and calendars, three RBA documents, two IMF documents, Treasury and Opposition statements, bank and AMP research, the Parliamentary Library, and ABC reporting. The $7 billion a year and "about one rate rise" figures are our arithmetic on Richardson's 2024 rule and Armstrong's $14 billion; Richardson's rule is a rough guide, not a model. Updated on 3 November 2026 after the RBA decision. Researched with AI tools; checked and edited by VOID.

Governments are spending a bigger share of the economy than before COVID, and that keeps interest rates about one hike higher than they'd otherwise be. But this year's jump in inflation mostly came from petrol and from power bills going back to full price when rebates ended. The RBA raised rates again on Melbourne Cup Day, and cutting spending would help a bit, but it won't fix petrol prices.