Economists call for budget bravery as rising inflation contributes to another RBA rate rise

Economists are urging the Albanese government to make brave decisions in the upcoming budget but to avoid offering sugar hits as Australian households prepare to sweat through another rate rise.

With early forecasts indicating inflation rates could reach "between the mid to high fours", according to Treasurer Jim Chalmers, the Reserve Bank of Australia has increased the cash rate to 4.1 per cent.

Explaining its decision, the RBA board noted inflation had picked up in the second half of 2025 and said the Iran war brought more inflationary pressures.

"The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation," the board said.

Purse strings around the country will now be yanked tighter and economists have told the ABC it is pain people have to feel to bring down inflation.

"The problem is, if you shield people from it, monetary policy doesn't work," EY Oceania regional chief economist Cherelle Murphy said.

But she said fiscal discipline from the government would be helpful.

"So when there are actual emergencies that can hit the domestic economy, then we're in the best position to deal with that," Ms Murphy said.

Interest rates were already on an upward trajectory, but the Iran war and the pressure it has placed on oil supplies have poured fuel on the fire.

Mr Chalmers noted on Sunday that there were "a lot of unknowns" about how the war would play out and the impact it would have on the economy.

"The source of the most extraordinary volatility in our forecasts, and in the economy more broadly and more importantly, is really how long this drags out for," he said.

Warnings against sugar hits

Economists are warning relief from rising mortgage payments and fuel costs could make the situation worse.

AMP deputy chief economist Diana Mousina urged particular caution around pressure on the government, from some quarters, to cut the fuel excise.

"I don't think we're at the point of cutting the fuel excise in half," she told the ABC.

"That's about the only thing we could do to help households, but I don't think cutting the fuel excise is a policy that should be considered."

But Ms Mousina conceded it could end up on the agenda come budget time if fuel prices continued to head skywards.

A cut to the fuel excise is something Energy Minister Chris Bowen has ruled out as "not on our agenda".

Independent economist Chris Richardson said rolling out help to ease the cost of living would only add to the inflation problem.

"I'm not saying don't do anything," he said.

One way to protect vulnerable members of society from rising expenses, Mr Richardson said, would be to "bust a gut" to cut spending broadly, while handing some back to people who really need it.

He suggested that could be targeted and temporary increases to some welfare payments.

"It's not terribly sexy, but it would be effective," Mr Richardson said.

ANZ senior economist Adelaide Timbrell is another voice urging caution around sweeping moves to ease immediate hip-pocket pain.

"It can exacerbate the existing problem and in some cases lead to more increases," she said of inflation.

With the federal budget inching closer, Ms Timbrell said she did not expect the government to make announcements along those lines.

"Broad measures that can help everyone hurts inflation and the longer we have that issue, the more it hurts people," she warned.

'A difficult budget'

While economists the ABC spoke to were wary about rolling out financial assistance to people, some did point out that this budget posed an opportunity for the government to be more daring with reform.

"I think we will see some tax changes coming through — we kind of need it because our tax system places too much onus on income earners," Ms Mousina said.

The treasurer has already flagged that May's budget will be a difficult but ambitious one.

"We've seen at least four, maybe five big economic shocks in the last couple of decades, and so I see all of this uncertainty and all of this volatility not as a reason to go slower, but as a reason to go further on reform," Mr Chalmers said.

But he added a caveat that the treasury forecast was yet to be finalised, and scenarios were being run as to what to expect with global oil prices and how price increases could impact inflation.

"It's not going to be as broad as increasing the GST, but I think they will do something around trying to reduce the [capital gains tax] discount or tamper with negative gearing," Ms Mousina said.

A shift on capital gains tax has started to look more and more likely, but questions remain about what form that could take.

With mortgage repayments increasing under the fresh rate rise and in the absence of cash injections to help people get by, Ms Mousina predicted the government would be keen to show the upcoming budget would not add to the inflation problem.

"The biggest thing in the budget will, I think, be to frame the government spending growth in a positive light … to show the budget is in a more sustainable pattern," she said.

Tinkering not enough, economist says

Mr Richardson argues that the government should be doing more than just "tinkering" with tax reform.

"Australia does need to change. There is less formal opposition to change than I've ever seen," he said of the political environment.

In the lead-up to the turn of the millennium, the Howard government introduced capital gains tax changes, which meant someone selling a property only had to pay tax on half the profit if they had held onto the investment for a year.

The government has been encouraged to consider going further than just returning to how things were before the discount was introduced, Mr Richardson said, or "the sound of economists weeping" would be heard.

While tax reform of some kind is almost certainly on the cards, Mr Chalmers said the budget will also focus on improving productivity.

"The budget will be focused on the inflation challenge, the productivity challenge and global economic uncertainty, and at least two of those three have been dialled up quite considerably in the last fortnight," he said.

Productivity volatility has been of concern to the RBA and the Productivity Commission.

"All the Reserve Bank can do is make sure we have low and stable inflation and, if we have full employment, both of those things are very stable environments for businesses to think about how they might improve productivity, how they might produce more for the same amount of labour and capital input," RBA governor Michele Bullock said in August.

To improve productivity, last year's roundtable made a raft of suggestions, ranging from a road-user charge to incentives for business investment.

Ms Murphy said the best thing the government could do for the economy and household budgets was to rein in inflation.

"Tax reform — that's the one where you can get bang for buck," she said.