{"id":63171,"date":"2026-05-18T17:35:20","date_gmt":"2026-05-18T07:35:20","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=63171"},"modified":"2026-05-18T17:35:20","modified_gmt":"2026-05-18T07:35:20","slug":"australian-government-being-bullied-by-the-rba-to-move-towards-irresponsible-austerity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=63171","title":{"rendered":"Australian government being bullied by the RBA to move towards irresponsible austerity"},"content":{"rendered":"

Last Tuesday (May 12, 2026), the Australian Treasurer introduced the 2026-27 Fiscal Statement (aka Federal ‘Budget’). I have been reluctant to comment on the ‘Statement’ given the constant repetition by the Treasurer about a ‘trillion dollars of debt’ and all the rest of the flawed conceptual development and nomenclature that has surrounded its release and subsequent public commentary. But I do want to make a few comments on some of the detail and subsequent commentary. The Government is running scared at the moment as the extreme Right-wing political party, One Nation threatens to take a swathe of seats at the next election (similar to what Reform UK is doing). It is also being bullied by the RBA Governor who is threatening more destructive rate hikes if the government doesn’t cut its fiscal deficit. Such a policy stance will see unemployment rise further (and in my estimation, much higher than the Government forecasts). And if there is any growth associated with the fiscal stance it will come from increasing household debt which is unsustainable given the record levels of indebtedness currently endured by the household sector. Overall, this is not an fiscal impressive statement.
\n<\/p>\n

Introduction<\/h2>\n

The ‘Statement’ made much of its intergenerational virtues, given that it cut some of the tax advantages that have been channelling investment funds into speculative financial assets and real estate away from productive capital formation.<\/p>\n

The wealth divide between workers who earn incomes and those that receive income as a result of ownership of financial and other speculative assets has increased rather substantially over the last 20 years.<\/p>\n

Younger Australians are now effectively locked out of the housing market as the wealthy indulge themselves in investments in multiple properties as a result of the tax write-offs that the policy allowed.<\/p>\n

Some of that largesse will be stifled by the new policy but the shifts are minimal and don’t go to the heart of the inequality problem – that taxes on income cannot be shifted or avoided by low-income earners while they can be substantially reduced by those on high incomes.<\/p>\n

Australia needs a wealth tax and a higher consumption tax to redress the discrepancies arising from the income tax system, but for that to happen, pigs might fly.<\/p>\n

I don’t really want to focus on these aspects of the ‘Statement’ anyway.<\/p>\n

My focus is on the macroeconomics of the fiscal strategy.<\/p>\n

Summary data<\/h2>\n

In ‘Budget Paper No.1’, Statement 2: Economic Outlook and Statement 3: Fiscal Strategy and Outlook, we observe the following forecasts.<\/p>\n

I will reflect on this data throughout.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
Aggregate<\/td>\n2024-25 (Actual)<\/td>\n2025-26<\/td>\n2026-27<\/td>\n2027-28<\/td>\n<\/tr>\n
GDP growth<\/td>\n1.3<\/td>\n2.25<\/td>\n1.75<\/td>\n2.25<\/td>\n<\/tr>\n
Current Account (% of GDP)<\/td>\n-2.5<\/td>\n-1.75<\/td>\n-2.75<\/td>\n-4.00<\/td>\n<\/tr>\n
Fiscal balance (% of GDP)<\/td>\n-1.0<\/td>\n-1.0<\/td>\n-1.0<\/td>\n-0.7<\/td>\n<\/tr>\n
Public Final Demand<\/td>\n>4.2<\/td>\n2.75<\/td>\n2.75<\/td>\n2.5<\/td>\n<\/tr>\n
Employment<\/td>\n2.1<\/td>\n1.5<\/td>\n1.5<\/td>\n1.75<\/td>\n<\/tr>\n
Unemployment<\/td>\n4.2<\/td>\n4.25<\/td>\n4.25<\/td>\n4.25<\/td>\n<\/tr>\n
Participation rate<\/td>\n67.0<\/td>\n66.75<\/td>\n67.0<\/td>\n67.25<\/td>\n<\/tr>\n
Inflation<\/td>\n2.1<\/td>\n5.0<\/td>\n2.5<\/td>\n2.5<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Government is moving to an inappropriate austerity stance<\/h2>\n

The Australian Financial Review published this Op Ed today (May 18, 2026)- \u2018Chalmernomics budget sliced up but didn\u2019t grow the pie<\/a> – which claimed that:<\/p>\n

\nWhat the government does have is \u201cChalmernomics\u201d \u2013 the deliberate strategy of using all available policy instruments to influence workers\u2019 wages and employment outcomes more directly. It favours retrograde interventionism, often regardless of productivity links or long-term growth. Chalmers\u2019 macroeconomic thinking draws heavily on modern monetary theory (MMT) influences \u2013 activist fiscal policy paired with accommodative monetary policy to provide a nominal anchor for wages and full employment. This helps explain earlier RBA review outcomes and persistent dovish tendencies relative to peer economies.\n<\/p><\/blockquote>\n

I thought I better correct that mistaken (deliberately or otherwise) association of the Government’s motivation and influence in drafting the ‘Statement’ with my work (Modern Monetary Theory).<\/p>\n

The author is an ex-Treasury, IMF economist and gets a fair amount of media exposure in Australia.<\/p>\n

Let me make it clear from the outset – the Treasurer (Chalmers) does not think in terms of Modern Monetary Theory (MMT).<\/p>\n

And MMT is not an “activist fiscal policy paired with accommodative monetary policy”.<\/p>\n

More on that as we go<\/p>\n

Here is the fiscal position since 2000-01 with the red bars indicating the forecast values.<\/p>\n

Over the forecast period there is a slight contraction planned, which is why the unemployment rate is forecast to rise.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Last night’s statement indicated that the federal government would be in fiscal deficit at least out to 2029-30 – ‘deficits for as far as we can see’ is the popular criticism.<\/p>\n

How many commentators can you count that use terms such as ‘eye watering deficits’ or similar.<\/p>\n

Almost all of them, which should deem them unqualified to speak in the public arena as so-called ‘experts’.<\/p>\n

Since 1970-71, the fiscal deficit has averaged 0.9 per cent of GDP.<\/p>\n

By 2028-29, it is forecast to be 0.7 per cent of GDP.<\/p>\n

The following graph shows the movement in these aggregates as a percent of GDP since 1970-71.<\/p>\n

The dotted segments are the fiscal statement projections.<\/p>\n

You can see that while payments are projected to fall more quickly than receipts, which is the reason for the projected shrinkage fiscal deficit by 2029-30.<\/p>\n

Both spending and receipts are slightly above their historical average at present.<\/p>\n

But there is nothing wild going on here.<\/p>\n

The fiscal support during the pandemic was substantial but now the aggregates are returning to ‘base’.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The fiscal shift from one year to another is the change in the fiscal balance as a percentage of GDP changes. <\/p>\n

It provides an idea of how expansionary or contractionary the current fiscal position is relative to the previous financial year.<\/p>\n

It is the result of two factors – the fiscal balance itself (in $As) and the value of nominal GDP (in $As).<\/p>\n

The following graph shows the recent history (from 1970-71) of fiscal shifts up to the end of the projection period (2029-30).<\/p>\n

A positive value indicates a contractionary shift (even if the fiscal position is still in deficit) and vice versa.<\/p>\n

The contraction in 2021-22 was large (a 5 per cent of GDP shift) as the Government abandoned the pandemic support.<\/p>\n

In the next year, the Government contraction continued (equivalent to 2.3 per cent of GDP) as it pursued surpluses – it recorded two surplus positions in 2023-24 and 2024-25.<\/p>\n

But the sustained withdrawal of net government spending killed economic growth and the Government was then forced to take an expansionary position as it approached a national election.<\/p>\n

The current ‘Statement’ forecasts a stable deficit outcome (zero shift) until a further fiscal withdrawal by 2029-30.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Is this an appropriate fiscal position to project over the next several years?<\/p>\n

As I explain below, the implication is that GDP growth will not be sufficient to sustain reductions in the national unemployment rate, which has risen significantly since 2024.<\/p>\n

In that sense, the current fiscal deficit is too small and a further contraction is taking policy in the wrong direction.<\/p>\n

Is the Government’s fiscal stance a reflection of the body of work that we now refer to as MMT?<\/p>\n

I guess it depends on what you think MMT is?<\/p>\n

If your understanding is restricted to MMT being “activist fiscal policy paired with accommodative monetary policy” then even then you would not conclude the current fiscal settings to be influenced by that restricted conceptualisation.<\/p>\n

First, monetary policy is anything but accommodative.<\/p>\n

As I have written previously, the RBA has hiked rates and then threatened the government with more of the same if it didn’t start moving towards an austerity stance.<\/p>\n

The Treasurer has acted accordingly and ignored all the challenges facing the nation that require bigger government (housing, climate, unemployment, degradation of education, health etc) and decided to move (slowly) towards a contractionary position.<\/p>\n

A fiscal deficit of 1 per cent of GDP is too low given the likely increase in the external deficit and the state of household finances (see below for more facts to support that statement).<\/p>\n

In other words, fiscal policy is being shaped by the dictates of the RBA.<\/p>\n

An MMT economist, regardless of their specific policy preferences, would never see it appropriate for the central bank to be determining the direction of fiscal policy.<\/p>\n

The productivity and unemployment inferences<\/h2>\n

The latest ABS estimates (March 19, 2026) released in the statement – Media Release<\/a> – tells us that:<\/p>\n

\nAustralia’s population grew by 1.6 per cent in the 12 months to September 2025 … <\/p>\n

Our population grew to 27.7 million, with 423,600 more people than in September 2024 …<\/p>\n

Natural increase added 112,600 people, with births up by 1.9 per cent and deaths down by 1.4 per cent. <\/p>\n

Net overseas migration added 311,000 people over the year.\n<\/p><\/blockquote>\n

The Treasury forecasts that labour force participation will rise a tad over the forward estimates.<\/p>\n

In ‘Statement 2: Economic Outlook’ (pp.79-80), the Government presents Box 2.4: Productivity transition and assumes that:<\/p>\n

\n… underlying productivity growth transitions to its long-run growth rate over time. Underlying productivity growth is assumed to be 1.2 per cent in 2031\u201332.\n<\/p><\/blockquote>\n

How does that influence the unemployment rate forecasts?<\/p>\n

The famous US economist Arthur Okun developed a rule of thumb about the way unemployment reacts to GDP growth.<\/p>\n

The rule of thumb has it that if the unemployment rate is to remain constant, the rate of real output (GDP) growth must equal the rate of growth in the labour force plus the growth rate in labour productivity.<\/p>\n

Remember that labour productivity growth reduces the need for labour for a given real GDP growth rate while labour force growth adds workers that have to be accommodated for by the real GDP growth (for a given productivity growth rate).<\/p>\n

If we assume the labour force grows in line with the assumed underlying population forecasts – so around 1.6 per cent (given participation is estimated only slightly higher – we can assume stable) and productivity growth is around 1.2 per cent on average over the forward estimates, then GDP growth has to be 2.8 per cent on average in each of the forecast years if the unemployment rate is to stay unchanged.<\/p>\n

A cursory look at the Table above, shows the following: if the forecasts turn out to be fact then the unemployment rate will indeed rise from its current level of 4.3 per cent, meaning that the 4.25 per cent forecast is likely to be too low.<\/p>\n

1. 2025-26 \u2013 GDP is forecast to be 2.25 per cent or around 0.55 points below the required rate.<\/p>\n

2. 2026-27 \u2013 GDP is forecast to be 1.75 per cent or around 1.05 points below the required rate.<\/p>\n

3. 2027-28 \u2013 GDP is forecast to be 2.25 per cent or around 0.55 points below the required rate.<\/p>\n

While these figures are approximations, and productivity growth is assumed to transition to 1.2 per cent per annum rather than instantly reach that level in the current year, the results suggest that there will be increases in the unemployment rate over the forward estimates period.<\/p>\n

The Government forecasts that the unemployment rate will rise from 4.2 per cent to 4.5 per cent over the period to 2027-28.<\/p>\n

What this suggests is that the Government forecasts are not internally consistent.<\/p>\n

The only way that the unemployment rate increase could be confined to 0.3 points over the next three years is if productivity growth stayed low or negative.<\/p>\n

The other way of considering this is to simulate the underlying labour force aggregates based on the Treasury assumptions with respect to employment growth.<\/p>\n

That simulation (using the ABS population growth data) and the Treasury employment growth forecasts, delivers an unemployment rate of 4.2 per cent by the end of June 2028 with unemployment rising from 656.33 thousand in March 2026 (actual value) to 676.55 thousand by the end of June 2028.<\/p>\n

Yet, the Government is forecasting the unemployment rate to rise to 4.5 per cent.<\/p>\n

Either way, the forecasts don’t speak to each other.<\/p>\n

My best guess is that the unemployment rate will rise further under the current policy settings that are indicating a contraction in net government spending.<\/p>\n

Why the government strategy is unsustainable<\/h2>\n

Looking back at the first Table, we see that the expenditure drain from the external sector is predicted to increase rather substantially over the forecast period as the predicted terms of trade decline significantly.<\/p>\n

Ally that with the knowledge that the fiscal deficit is forecast to decline from 1 per cent of GDP to 0.7 per cent.<\/p>\n

Taken together it means that private domestic demand will have to do the lifting and that suggests rising indebtedness.<\/p>\n

We know that the financial balance between spending and income for the private domestic sector (S – I) equals the sum of the government financial balance (G – T) plus the current account balance (CAB).<\/p>\n

The sectoral balances equation is:<\/p>\n

(1) (S – I) = (G – T) + CAB<\/p>\n

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector to net save overall (S – I > 0). <\/p>\n

Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to accumulate financial assets.<\/p>\n

Expression (1) can also be written as:<\/p>\n

(2) [(S – I) – CAB] = (G – T)<\/p>\n

where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.<\/p>\n

This is the familiar Modern Monetary Theory (MMT) statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).<\/p>\n

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.<\/p>\n

All these relationships (equations) hold as a matter of accounting.<\/p>\n

The Government is estimating that the negative global factors will continue to undermine Australia’s terms of trade.<\/p>\n

By 2027-28, they forecast a decline of 7.25 per cent in our terms of trade<\/p>\n

Australia is forecast to return to its usual position of an external deficit of 4 per cent of GDP – a state that has been dominant since the 1970s.<\/p>\n

The following graph tells the story.<\/p>\n

It shows the sectoral balance aggregates in Australia for the fiscal years 2000-01 to 2028-29, with the forward years using the Treasury projections published in ‘Budget Paper No.1’ in dotted form.<\/p>\n

The projections begin in 2026-27 and I have assumed that 2028-29 outcome will be equal to the 2027-28 Government estimate.<\/p>\n

All the aggregates are expressed in terms of the balance as a percent of GDP.<\/p>\n

I have modelled the fiscal deficit as a negative number even though it amounts to a positive injection to the economy.<\/p>\n

You also get to see the mirror image relationship between it and the private balance more clearly this way.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

It becomes clear, that with the current account deficit (green area) projected to return increasing deficits, which drain net spending from the domestic economy and with the fiscal balance moving towards zero over the same period, the private domestic balance (red line) will head quickly into higher deficits.<\/p>\n

Higher private domestic deficits mean higher levels of indebtedness.<\/p>\n

The Household sector is already carrying record levels of indebtedness which is why household consumption expenditure has been slowing down appreciably in the face of rising cost-of-living pressures.<\/p>\n

So reflect on that in relation to the previous section on sources of growth.<\/p>\n

You can see that the pandemic support from Government clearly allowed the private domestic sector to rebuild its saving buffers and reduce the precarity of its balance sheet (given the massive household debt).<\/p>\n

In the earlier period, prior to the GFC, the credit binge in the private domestic sector was the only reason the government was able to record fiscal surpluses and still enjoy real GDP growth.<\/p>\n

But the household sector, in particular, accumulated record levels of (unsustainable) debt (that household saving ratio went negative in this period even though historically it has been somewhere between 10 and 15 per cent of disposable income).<\/p>\n

The fiscal stimulus in 2008-09 saw the fiscal balance go back to where it should be – in deficit – given the nation’s external deficit position.<\/p>\n

This not only supported growth but also allowed the private domestic sector to start the process of rebalancing its precarious debt position.<\/p>\n

You can see the red line moves into surplus or close to it.<\/p>\n

That process was interrupted by the renewal of the fiscal surplus obsession in 2012-13.<\/p>\n

The strong fiscal support during the pandemic overwhelmed all the nonsensical deficit scaremongering and allowed the private domestic sector to increase its overall saving (and pay down debt) which was a good thing.<\/p>\n

But as the previous government withdrew its stimulus and the current government continued to pursue a contractionary fiscal position (see above), the private domestic sector has only one option given the trends in the external sector if it wants to maintain consumption expenditure – resume the process of accumulating more debt.<\/p>\n

With a global recession threatening and with higher interest rates the norm, the strategy outlined in the Government’s fiscal statement is once again placing the economy on an unsustainable path relying on household debt accumulation, which is a finite process.<\/p>\n

Conclusion<\/h2>\n

There are many other aspects to the current fiscal stance which I could discuss if I had more time.<\/p>\n

In general, I am unimpressed.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2026 William Mitchell. All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"

Last Tuesday (May 12, 2026), the Australian Treasurer introduced the 2026-27 Fiscal Statement (aka Federal ‘Budget’). I have been reluctant to comment on the ‘Statement’ given the constant repetition by the Treasurer about a ‘trillion dollars of debt’ and all the rest of the flawed conceptual development and nomenclature that has surrounded its release and…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[70],"tags":[],"class_list":["post-63171","post","type-post","status-publish","format-standard","hentry","category-fiscal-statements","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63171","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=63171"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63171\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=63171"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=63171"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=63171"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}