On 29 September the Reserve Bank lifted the cash rate to 4.60%. That is its fourth rise this year and the highest rate since 2011. When this government took office in May 2022, the rate was 0.35%.
The Treasurer blames the Middle East and an AI investment boom. The Opposition calls it "home-grown inflation". So is government spending pushing up interest rates? Here is what the Reserve Bank, the ABS and the Budget papers actually show.
What the 2026 rate rises cost your mortgage
The average new owner-occupier loan is now about $731,000 (ABS, June quarter 2026). Canstar's figures assume banks pass each rise on in full, and they usually do. Roy Morgan's July survey, taken before the September rise, found 1.79 million Australians at risk of mortgage stress. Only the 2008 financial crisis was worse. Arrears are still low, because most people have jobs. Stress means the budget is squeezed, not that people are missing payments yet.
How much is the government spending?
In 2025-26 the Commonwealth spent $786.6 billion. That is 26.9% of GDP, the highest since 1986-87 outside the pandemic (Final Budget Outcome, 28 Sep 2026).
Count every level of government and public demand is 28.9% of the economy (EY, June quarter 2026). Before the pandemic the ten-year average was 24.4%. That gap of four and a half points is labour, materials and building capacity that government now takes up and the private economy cannot use.
The 2025-26 deficit came in at $22.3 billion, better than forecast. Look at why, though. Tax receipts jumped to 24.1% of GDP, while spending came in only $1.4 billion under the Budget estimate. A smaller deficit funded by higher tax does little to cool demand. Most of the improvement came from revenue, not restraint.
Government spending did not start this fire. It keeps adding fuel, and mortgage holders pay for the extinguisher.
Does the RBA blame government spending?
The RBA does not blame the government. It does not clear it either.
Governor Michele Bullock told a parliamentary committee on 6 February: "If we are at capacity and we've got capacity constraints, then anything that adds to aggregate demand adds to those capacity constraints, be it public or private, it's a fact."
On 29 September she rejected the idea that the Middle East explains it all: "This isn't all about the Middle East conflict. It is making things much worse, but we did start from a position of excess demand anyway, and that's why we started raising interest rates even before the conflict started."
The Bank's method matters here. It takes government spending "as given" and sets rates for total demand. So on its own logic, every extra dollar the government adds to an economy already at capacity is a dollar the Bank has to take back out through higher rates. And the only place it can take it from is households and business.
The Budget that made the job harder
The RBA had already raised rates three times by May 2026. Inflation had hit 4.6%. That was the moment the government chose a Budget whose new decisions added a net $6.5 billion in spending for 2026-27.
CBA's economists judged the Budget "neutral-to-mildly expansionary". They said it "does little to help in the fight against inflation" and that "the risk sits with further tightening by the RBA". Four months later, that risk became the September rise.
That is the strongest charge. The government did not create the inflation problem. But it had a clear chance to make room for the Reserve Bank, and it chose not to take it.
The strongest case for the government
Put its defence at its best
- Private demand drove the 2026 surprise. Bullock, 12 February: "The key difference there is not fiscal policy… The key difference is private demand."
- Public demand growth has slowed. It grew 2.2% in 2025-26, the slowest in 11 years, against private demand at 3.6%. It added just 0.1 points to growth in the June quarter.
- Energy prices were the trigger in September. The RBA's statement leads with higher global energy prices from the Middle East conflict and does not mention government spending.
- The budget position has improved. There were two surpluses, deficits are beating forecasts, and all three agencies still rate Australia AAA.
All four points are true, and none of them changes the arithmetic. Spending at a four-decade high still uses capacity the economy does not have. A slower growth rate does not undo a high level.
The verdict: is spending to blame for higher rates?
Claim: government spending caused the rate rises. Not supported. The Reserve Bank points to private demand, energy prices and weak productivity. Its Governor says flatly: "productivity is doing nothing."
Claim: government spending is keeping rates higher than they need to be. Supported. Public demand is far above its historical share, and the Bank counts every dollar of it. Nobody has published a credible estimate of how much higher. Anyone quoting a precise figure is guessing.
Claim: the government could have helped and didn't. Strongly supported. The May Budget added to demand in the middle of a tightening cycle.
It is also worth being clear about what is not Canberra's doing. State governments run most of the big infrastructure pipelines, and the RBA says state investment has been a source of strength. Our state debt pages cover that separately.
Your questions, answered
Is government spending causing inflation in Australia?
It is contributing, not causing. Public demand is about 29% of GDP against a pre-pandemic average of 24.4%, and the RBA counts it in the total demand it says is too high. But the RBA says the 2026 surprise came from private demand.
Why are interest rates going up in Australia in 2026?
The RBA cites elevated inflation, higher energy prices, pressure on domestic capacity and high inflation expectations. It says the economy started the year with excess demand.
How much does each rate rise add to my mortgage?
The September rise adds about $91 a month on a $600,000 loan and $114 on $750,000, if passed on in full (Canstar).
Does the RBA blame the government?
No. It takes government spending as given. But it says any added demand at capacity adds to inflation pressure, whether public or private.
Will interest rates go up again?
Possibly. The RBA says it will raise rates further "if needed". Westpac expects a November rise. The September-quarter inflation figures, due in late October, will be decisive.
For the full story of the 2022–25 cycle, read Inflation, the RBA and the rate-rise cycle. The pages on the spending ratchet, the structural deficit, the interest bill on the debt and off-budget funds cover the rest.