Australian families are facing acute and immediate cost of living pressures, caused by rapidly rising inflation, energy costs, and rising mortgage repayment rates. One of the key causes of rising inflation is debt and deficit-financed government spending.
This report examines the relationship between government spending, inflation, and mortgage rates, and its key findings are:
- A one percentage increase in government spending causes a 0.35 percentage point increase in annual inflation, and that a one percentage point increase in annual inflation causes average household mortgage rates to increase by 0.42 percentage points.
- According to the 2022-23 federal budget, average annual federal government spending is expected to increase by 4.6 per cent to 2025-26. This will cause an additional estimated 1.62 percentage point increase in annual inflation from June 2022 levels, all other things being equal, from 6.1 per cent to 7.7 per cent by June 2023, and 12.6 per cent by June 2026.
- The RBA will respond to this inflationary pressure by raising the cash rate target, which will have the combined effect of putting downward pressure on inflation and significantly increasing the cost of household mortgage repayments. A 1.62 percentage point annual increase of inflation will have the estimated impact of increasing household variable mortgage rates by 0.67 percentage points.
- For households, a 0.67 percentage point increase in the household mortgage repayment rate per annum over the next three years will have an estimated effect of pushing up typical monthly mortgage repayments by $257, which is$3,088 per year.
- The projected increases to spending will mean Australians as a whole will pay an estimated $10 billion per year in additional interest on their home loans as a consequence of increased federal government spending between 2023 and 2026.
In addition, government spending increased by 28.9 per cent, or 9.6 per cent per year, over the Covid era of 2020-2023, which has caused the typical monthly mortgage repayment to rise by $554, or $6,643 per year. In aggregate terms, Australians with a home loan have been paying an estimated $21.5 billion per year more in interest annually, as a result of rising levels of government spending between 2020 and 2022.
