Too much spending or too little tax? Why interest rates are rising

A few minutes after Michele Bullock's press conference to announce the interest rate decision, the blame game will begin. She won't answer who is responsible for the inflation outbreak, but it's clear that the Opposition has been cleverly blaming the federal government for profligate spending. Shadow Treasurer Tim Wilson is taking advantage of this narrative, accusing Treasurer Jim Chalmers of spending taxpayers' money like a drunken sailor and pushing up prices.

However, this narrative is misleading. Government spending alone does not create or mitigate inflation; deficits, the shortfall between tax revenue and spending, are the real culprits. Deficits inject a net inflow into the economy, spurring demand. The bigger the deficit, the more stimulus is added. Australia has been running a deficit for years, and while it's true that we are still doing so, it's important to note that two massive oil price shocks have significantly increased the cost of almost everything, contributing to our inflation problem.

Furthermore, private sector spending has surged significantly, particularly in the construction of data centres, which is also driving up costs. While government spending has risen, it's important to consider that the gap between revenue and spending is now just 1% of GDP, which is much lower than it was a decade ago and indicates improved fiscal management.