Too much COVID stimulus, not enough budget cuts: Saul Eslake

Eslake is the latest in a string of economists, including former Treasury official Steven Hamilton and Brendan Coates of the Grattan Institute, who have criticized the RBA’s rate settings in recent years. Those criticisms led to a review of the RBA ordered by treasurer Jim Chalmers last month.

Eslake said the RBA had made two major mistakes: putting a date on how long it would keep interest rates at record lows, and assuming inflation would only rise as a result of faster wage growth.

He said the bank, through its quantitative easing program, had created another looming problem that would flow directly into the federal budget’s outcome.

The bank could eventually pass $10 billion in interest to commercial banks that carried cash, while all government bonds bought by the RBA have very low interest rates.

The gap between what it had to pay commercial banks and the interest it earned on its own debt positions meant that the RBA’s ability to pay dividends to the federal government could be “nullified.”


Over the past five years, the RBA has paid $9.5 billion in dividends to the federal government, including $2.6 billion in 2020-21, despite a $4.3 billion loss.

Eslake said the lack of dividends would be just one of the problems for the government as it seeks to restore the budget, which carries nearly $900 billion in gross debt, and tax reforms must be taken into account.

“Much of the ‘budget repair’ job will have to be accomplished on the revenue side – ideally through tax reform, not through ‘bracket creep’,” he said.

There may be some calm for home buyers, as data from the United States shows inflation in the world’s largest economy was flat in July. Annual inflation fell from 9.1 percent to 8.5 percent.

Kathy Bostjancic, chief economist at Oxford Economics, said the Federal Reserve could lower expected rate hikes in the coming months if inflationary pressures continue to ease.

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