The Reserve Bank has played its part. Now it’s Jim Chalmers’ turn

It may not be an official recession, but the Reserve Bank knows it may feel like one for plenty of Australians after it delivered another dose of monetary policy punishment to the country.

As it confirmed the fifth hike in official interest rates this year, the bank released its latest set of economic forecasts.

Despite a further tightening in monetary policy, the bank expects the economy to grow by 1.6 per cent in the year to June and keep on bumbling along from there. It doesn’t have a negative quarter of growth in its forecasts.

Much of that growth is being driven by the AI construction boom, which is close to hitting the sort of expansion that Australia witnessed during the early 2010s during the mining construction boom.

That’s great if you’re in the data centre construction sector, a tech bro or an AI believer who has signed up to live with Elon Musk on Mars.

But outside of that world, it’s a very different story.

A person with a $600,000 mortgage is shelling out almost $500 extra in monthly repayments this year. The huge lift in oil prices has added about $100 a month to the cost of filling up the tank in their car.

The bank believes inflation is going to remain higher for longer, partly because Donald Trump’s four-week war against Iran is now in its ninth month.

If the RBA is to be believed, real wages – that’s wage growth minus inflation – are likely to fall by a full percentage point this year.

And, again if the bank is correct, unemployment is heading back above 5 per cent.

Then factor in the steep fall in property prices, which the Commonwealth Bank on Tuesday said could be about 15 per cent in the nation’s capital cities.

That’s a depressing, if not recessionary, set of numbers.

The official numbers say we’re not in a recession, with bank governor Michele Bullock noting that “we don’t see the economy cracking at this point”. But many Australians can certainly hear some very alarming noises.

While Bullock and RBA staff made clear they were concerned about the fallout from what most of the board considered as a necessary decision, the political problem is Jim Chalmers’ to bear.

The bank, helpfully, noted that public demand was moderating. Governments have been slow to get money out the door this year. Next year, public expenditure is likely to pick back up.

So while public demand keeps growing, and growing at faster than the overall economy, it puts pressure on Chalmers (and every state and territory treasurer) to do far more to curb government spending.

The starting point is the overall deficit.

After a $10 billion deficit in 2024-25, it widened to $22 billion last financial year. It is forecast to grow to $31.5 billion this year. By any measure, that is a loosening of fiscal policy.

The least Chalmers can do is aim for a deficit no larger than the 2025-26 numbers. And he can’t do that simply by swallowing some extra revenue and moving some spending from one sector to another. He, and the expenditure review committee, need to find real cuts for next month’s mid-year budget update.

Those cuts may add to the recessionary vibes being felt by many people. But that’s the price for being the treasurer – he has to make the tough decisions.

As the RBA noted, the war in the Middle East is a huge problem. It is going to stick in the inflation figures for another 12 months at least.

The AI construction boom may be the greatest breakthrough in productivity since Stephenson’s Rocket or, if the recent warning by Anthropic comes to pass, could end humanity.

Whatever the result, the boom is muscling its way into our economy no matter what. And the companies building it are willing to pay anything to get a result. That means inflation.

That means the best Canberra (and the states) can do is make some economic headroom.

The Reserve Bank is doing what it can to make that room by whacking borrowers and small businesses with higher interest rates. Chalmers has to play his part by slicing into his own expenditure.

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