Australia's pre-election spending jeopardizes budget

Australian treasurer Jim Chalmers is facing a daunting task of preparing a pre-election budget. Trying to attract voters, the government has already allocated 35 billion Australian dollars ($22.05 billion) for various public needs. The spending is increasing, while inflation is still above the central bank's target of 2–3%.

According to Su-Lin Ong, chief economist at Royal Bank of Canada, the persistently high level of government spending will exert pressure on monetary policy. Spending above the historical norms will make it difficult to continue cutting interest rates. The situation is also complicated by the low unemployment rate of 4.1%, contributing to wage and tax increases that mask the problem of widening budget deficit.

Diana Musina of AMP also points out the record share of government spending in the Australian economy. At the same time, the administration is trying to artificially reduce inflation through various offsets, including energy subsidies and tenant support. Such measures may temporarily reduce official inflation, but they create long-term risks for the budget and may heat up the economy even more, according to experts interviewed by Bloomberg.