Former Reserve Bank of Australia governor Philip Lowe has taken a swipe at the Labor government, warning it needs to rein in spending to ease pressure on inflation and interest rates as Aussies face yet another hike.

His comments come as Treasurer Jim Chalmers confirmed this week the federal budget deficit had blown out to $22.3 billion on an underlying basis and $36.1 billion on a headline basis. 

‘Now we find ourselves running sizeable budget deficits at a time where we’re at full employment and commodity prices are very high. We should be running sizeable surpluses,’ he told the Institute for Public Affairs podcast.

‘Government spending has been adding to demand progressively over time, and that’s putting upward pressure on inflation.’

Lowe also said the Reserve Bank’s relationship with the current government had become more strained than under the previous Coalition government.

‘The relationship with the current government has been more strained,’ he said, adding that it ‘wasn’t as strong as it had been in the past’.

He also argued tax reform was needed to boost investment, productivity and economic growth – hinting at lowering taxes for Aussie workers.

‘To get productivity increasing again, our living standards rising, we need Australia to be a great place for firms to invest, expand, innovate, and hire people,’ Lowe said. 

Former Reserve Bank of Australia governor Phillip Lowe has taken a swipe at the Labor government, warning it needs to rein in spending to ease pressure on inflation and interest rates

Lowe said that the Albanese government had a ‘strained’ relationship with the Reserve Bank 

‘So we need to have a pro-growth, pro-investment culture.

‘So when people ask how you do that, the first thing I think is taxation.’

Lowe said Australia needed greater focus on economic growth rather than policies centred on redistributing income and wealth. 

‘That’s the main economic social problem… unless we change things, the stagnation is going to continue and we could go more than a decade without any advance in our real living standards, which, after three decades, is a huge disappointment, and I can understand why people aren’t happy,’ he said. 

His comments come as cash-strapped borrowers are being warned of more hikes to come by the Reserve Bank of Australia after it lifted interest rates to a 15-year high. 

In a unanimous decision, the central bank’s nine-member board lifted the cash rate target by 25 basis points to 4.6 per cent as it wrapped up its two-day meeting on Tuesday. 

Inflation was too high and the board needed to lift interest rates to get it down, RBA governor Michele Bullock told reporters in Sydney. 

She said the RBA would raise interest rates further ‘if that’s what’s needed to get inflation down’.

Treasurer Jim Chalmers acknowledged the Middle East conflict wasn’t the only factor driving inflation, but he did say it was the main factor

Bullock stopped short of blaming government spending, but made clear Australia’s inflation problem is partly home-grown, saying the economy was already suffering from excess demand before the Middle East conflict intensified. 

‘This isn’t all about the Middle East conflict.

‘It is making things much worse, but we did start from a position of excess demand anyway, and that’s why we started raising interest rates even before the conflict started.’ 

Yesterday Daily Mail asked whether public sector spending was adding to aggregate demand and making the RBA’s job harder. 

‘I’ve made this point a number of times before: aggregate demand is made up of both public demand and private demand. They both contribute to aggregate demand,’ Bullock replied. 

On Monday, finance minister Katie Gallagher appeared to wash her hands of the problem.

‘The challenges that we’re having now in relation to inflation are not caused by government spending,’ Gallagher boldly declared.

Treasurer Jim Chalmers acknowledged the Middle East conflict wasn’t the only factor driving inflation, but he did say it was the main factor.

‘Australians were already paying a very hefty price for decisions taken about this prolonged war in the Middle East, and today that price got a bit steeper,’ he told reporters in Brisbane.