'No amount of savings makes inflation go away': senior government figure concedes spending cuts cannot fix the inflation crisis

An unnamed senior government figure was reported as describing as a 'common misperception' the idea that drastic reductions in public spending could bring Australia's inflation under control, ahead of December's mid-year economic update, which has become a major political test for the government. 'Yes, we can help at the margins and yes we could make it worse at the margins,' the source said. 'But we have this inflation when public demand is already retreating, which shows there's so much else at play - private sector and global. The idea that savings will be the most important determinant has never been right. It will be responsible; there will be savings. But there's no amount of savings that makes inflation go away.'

The admission comes as Treasurer Jim Chalmers faces mounting pressure to rein in government expenditure and to find genuine savings rather than rely on accounting measures, with annual inflation around 4 per cent, outside the central bank's 2 to 3 per cent target range, after five interest rate increases this year pushed the cash rate to 4.85 per cent. Households and businesses are still dealing with elevated prices and borrowing costs: more than six in ten Australians say they are financially worse off than a year ago, according to Compare the Market's 2026 Household Budget Barometer survey of more than 3,000 people, which found 61 per cent felt financially fatigued and just 9 per cent believed the cost of living was improving. Major employers including National Australia Bank, Qantas, Canva and Telstra have announced job cuts.

Finance Minister Katy Gallagher has previously refused to guarantee the government will deliver net savings, warning of growing pressures on the federal budget, while Education Minister Jason Clare declined to rule out further cost-of-living assistance, insisting Labor takes responsibility for tackling inflation. 'We understand that Australians are doing it tough here and that we've got challenges with inflation that are made worse by what's going on overseas, by the war,' he said. The challenge for the government is that cutting spending too aggressively could also weaken an economy already showing signs of strain: ANZ chief executive Nuno Matos has warned that inflation, rising interest rates, increased government spending and the global artificial intelligence investment boom are creating a dangerous combination for markets, forecasting growth below 2 per cent in both 2026 and 2027 and warning that Australia's lack of productivity was limiting how fast the economy could expand without adding to inflation. Clare said the government would take responsibility for its part in tackling inflation and that the budget update would show that work.