Hip-pocket politics is Labor’s greatest vulnerability – and red-hot anger over the latest rate rise isn’t helping | Tom McIlroy

The economy is almost always the main game in Australia’s federal elections. The past week proved it will be as central as ever between now and the 2028 poll.

But, as Labor tries to manage persistent inflation and interest rates rising to a 15-year high, its political standing is not helped by red-hot voter anger or common misunderstandings about how critical economic levers actually work.

Countless talkback radio callers around the country this week lashed the Reserve Bank governor, Michele Bullock, for Tuesday’s rates decision and her warning that more hikes could be coming soon. Punters being pushed to the limit financially called her and the bank’s board “heartless” and “cruel” for lifting the cash rate to 4.6%.

This view, and broader anger in the electorate about how expensive things feel, might be explained in part by figures contained in Reserve Bank research released in July.

It found a large gap in understanding how interest rates actually affect inflation. Worryingly, only 25% of respondents could correctly explain that higher interest rates would ultimately lead to lower inflation. More than half believed higher interest rates would actually push up costs in the economy, the exact opposite of what the central bank is trying to achieve.

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Labor had a tough week trying to defend its part in the bank’s decision, with Anthony Albanese and Jim Chalmers blaming Donald Trump’s war in Iran and the resulting global fuel shock for the inflation quagmire which risks overrunning the government.

Headline inflation rose to 4% in the year to August, up from 3.5%. Trimmed mean inflation, the bank’s preferred measure, held steady at 3.6% for a third month – way above the bank’s 2-to-3% target band. The figures came a week after unemployment climbed to a near five-year high and as it was confirmed house prices had fallen for a sixth consecutive month, after changes to make negative gearing and capital gains tax less generous.

Bullock put some of the blame on excess demand in the economy from government spending, arguing fuel prices and other disruption from the Middle East were “in addition” to the problems at home. The New South Wales premier, Chris Minns, joined in too. He distanced himself from Labor colleagues in Canberra, pointing out his state government had been careful to control spending, including through pursuing offsets to balance the cost of new programs.

Chalmers says real spending growth has averaged 2% a year under Labor, but that figure is dragged down by a sharp fall in spending in 2022-2023 as pandemic support packages were wound back. Excluding that year, real spending has grown by an average 4.2% a year, compared with 2.6% under the Coalition, in the six years before the pandemic. These figures were included in this week’s statement on the final budget outcome for 2025-2026.

Despite Bullock’s frank assessment, Chalmers told a summit organised by the Australian Public Policy Institute on Wednesday that Australia’s economic challenges were “not exclusively global, but right now they are primarily global”.

Other than big cuts to the National Disability Insurance Scheme, Labor may not have many options for reducing spending, given the government wants to implement its agenda in health, education, social programs and defence, even adding big ticket new items like universal childcare if it wins a third term in 18 months’ time.

Chalmers says he is throwing everything at fixing sluggish productivity, something Bullock highlighted as “doing nothing” to help the country’s woes. Respected budget watcher Chris Richardson says that particular problem is acute, calling the economy “completely clapped out” and warning that every time we get five minutes of economic sunshine, the inflation dragon rears its head again. Growing productivity – something that is notoriously hard to shift – is a test Labor has set for itself.

All these challenges are before the mid-year budget update, due just before Christmas, when surging global interest rates will show up big challenges for the budget. The borrowing costs for governments and companies, including cash-hungry AI developers, are being pushed up around the world, due to unsustainably high government deficits. That makes the cost of debt higher and higher. As the Australian Financial Review reported this week, Treasury forecasts that interest payments will overtake Medicare spending by 2028-2029, due to $1.2tn in federal debt.

Chalmers and the finance minister, Katy Gallagher, will have to find more savings before the end of the year, both out of political necessity and economic reality. Already some of the government’s modest savings – including capping some allied health benefits for veterans and reducing the private health insurance rebate for seniors – have proved politically painful.

All of this could be an opportunity for Angus Taylor and the opposition. Even though the Liberal leader refused to give Labor any slack for the contribution the international energy crisis was making to Australia’s inflation rate, winning back the confidence of voters as better managers of the economy is essential for the Coalition.

One Nation – which looks set to win a slew of seats in Victoria’s state election in November and in NSW in March – can reflect voters’ anger back to them in a powerful way, but Pauline Hanson’s policies are gibberish. Taylor must convince voters that his plans would actually turn things around, showing up both Labor and One Nation.

Challenged to explain where he would make spending cuts to take pressure off inflation, Taylor nominated Labor’s net zero by 2050 programs; the winding back of some of its vehicles to deliver new housing; slashing of “corporate welfare”; and limiting spending on the NDIS and other welfare programs; while giving support for first home buyers only to Australian citizens.

As tough as this week was for Labor, its struggles on inflation, high interest rates and cost-of-living pain look likely to grow. Hip-pocket politics, once again, risk becoming the government’s biggest vulnerability ahead of the election.