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The Reserve Bank will not look favourably on the government's decision to boost childcare wages amid growing inflation fears, according to a former assistant governor.
Prime Minister Anthony Albanese has announced a 15 per cent pay rise for early childhood workers, with 10 per cent to start in December and the remainder a year later.
Mr Albanese said workers in the sector, among Australia's lowest-paid, "deserve decent wages and conditions".
The move follows a decision of the Fair Work Commission and comes with a temporary agreement from childcare providers to cap fee increases at 4.4 per cent.
But the addition to government spending comes just days after the RBA warned current spending levels were adding to its fear of persistent inflation.
That fear prompted Governor Michele Bullock to declare on Tuesday that an interest rate cut was unlikely until at least February.
Luci Ellis, who is now Westpac's economic spokesperson after three decades at the RBA, said the Reserve Bank would be concerned about any new government spending in this context.
"It's not enough to move the dial on their [inflation] forecasts, but the Reserve Bank does seem to be in a bit of a mindset at the moment that every single dollar of demand is a problem," she told the ABC's Insiders On Background podcast.
"Higher wages does mean more spending from more people, so that does mean at the margin the Reserve Bank will be thinking, 'well, that's a bit more demand from consumers,' even though they're only a small subset of consumers."
She said higher wages in government-funded sectors could also fuel inflation via higher prices.
"That's the typical pattern that we've seen over many years," she said, adding that even 4.4 per cent fee hikes were "still higher than the inflation target".
Government and RBA on different song sheets?
Anthony Albanese has denied the wage push is inflationary.
"It's not, because what it will do is keep costs down," he said, adding it could help productivity by boosting the availability of child care and supporting parents to return to work.
"If we didn't do something about the wages of childcare workers and aged care workers, then we wouldn't have a workforce."
When the government announced an aged care pay rise earlier this year, Ms Bullock supported the move, praising the contribution of care workers and saying she would "not begrudge" them higher pay.
But in the latest Statement on Monetary Policy, published on Tuesday, RBA officials said they were concerned about the overall level of spending by federal and state governments.
"Public [government] demand is forecast to be stronger than previously expected, reflecting recent public spending announcements by federal and state and territory governments," the statement read.
The federal government has argued it is "showing restraint" with its two consecutive budget surpluses, and its childcare fee reductions and energy bill relief will help the inflation fight.
"The way that we're delivering our cost-of-living help is putting downward pressure on inflation, and that is our objective," Treasurer Jim Chalmers said on Wednesday.
"Inflation would be higher without our efforts in the budget."
But the RBA sees the energy bill relief as broadly irrelevant to inflation, saying it will move the headline figure up and down but "not materially affect underlying inflationary pressures."
Ms Ellis said the rebates were "relatively small in the scheme of things … It's a bit of a trick to reduce measured inflation this year".
She said it would have two contrary effects on inflation.
"It is extra money in people's pockets that they would otherwise be spending on their energy bills.
"Against that … Many other prices are just marked [to increase] on whatever inflation was last year. That does mean that prices don't rise as much next year, so it does help a little bit."
Concern about the infrastructure pipeline
Of greater concern to Ms Ellis and the RBA is federal and state government spending on infrastructure projects.
In its statement, the RBA said the "large pipeline of infrastructure projects" would prop up public demand and add to cost pressures in construction, which would also keep the pressure on rents by holding back housing supply.
Ms Ellis said construction costs were "still incredibly strong".
"Builders can [either] build houses or they can work on infrastructure projects, so to the extent that there are infrastructure projects … that would be adding [to demand]," she said.
"It's not just about the workers, it's about the process and the building material … The cost of development is so high that a lot of housing projects are unviable."
Taylor Nugent, a senior economist at NAB, also pointed to infrastructure as a large inflation risk.
"The important thing is less about the size of the total government spend and more about governments, and state governments in particular, trying to deliver these infrastructure projects when we have capacity constraints in the construction industry."
Independent think tank the Grattan Institute has called for the government to avoid committing to any projects above $200 million until construction cost pressures subside.
And independent MP Allegra Spender told the ABC the government should look to pause any project it could.
"Housing should be the absolute top priority. Those other projects, they're important but they can wait, and that's both from an inflation point of view but also from a value point of view from the taxpayer."
The federal government cut some projects in the pipeline last year to take pressure off inflation, but on Wednesday Jim Chalmers downplayed the prospect of a major halt.
"From budget to budget, often you'll find that there are tweaks made to the infrastructure pipeline … But our major focus here is on building the infrastructure and the housing, not the infrastructure or the housing."
But Ms Spender said the government needed to be more selective.
"Of course we want to build infrastructure and housing, but we have to prioritise when it comes to what we can realistically deliver."
She said the government should also fight inflation by focusing on boosting productivity, which lifts what the economy could supply.
"We need to be looking at the supply-side reforms … Even on child care, I'm very supportive of childcare workers having higher wages, I think we have undervalued their contribution for a long time, but talking to childcare providers, the burden of bureaucracy means it's become harder for them to provide their services."
Disagreement on the nature of the problem
An even more fundamental disagreement has opened up between the government and the RBA on how households are going.
The government has framed its cost-of-living supports on the proposition that households are "doing it tough".
But the RBA has the opposite worry about many households with mortgages. In its statement, it noted mortgage holders had become wealthier even in the face of interest rate rises because the price of their homes had also risen.
"[This] is supporting household wealth and household credit growth has picked up, suggesting that households have become more willing to borrow.
"Housing and personal loans arrears … remain around pre-pandemic levels and nearly all borrowers are expected to be able to service their debts … All else equal, an increase in wealth tends to be associated with stronger consumption."
The RBA did point to acute struggles for renters, typically young people, and a subset of home owners "with limited or no financial buffers".
But household spending was listed alongside government spending as a key risk factor for persistent inflation.
A third risk factor identified by the RBA was the strong job market.
Despite a slight increase in unemployment, hours worked have increased in recent months and job vacancies remain higher than pre-pandemic levels as businesses continue to report difficulty finding staff.
This focus on the signs of "heat" in the economy contrasts with the government's focus on signs of weakness.
But economists are just as likely to disagree with one another as politicians and officials.
Mr Nugent agrees with the RBA that there is no prospect of a rate cut this year, with NAB forecasting a May rate cut.
"Nothing about the way the economy is moving suggests we are ready for a rate cut," he said.
He believes government spending has "made it challenging … A lot of the policy interventions are reducing the squeeze on households. The purpose of that is to relieve cost-of-living pressures but in the aggregate, it can contribute to inflation".
Despite those concerns, he noted the RBA still believed it could banish inflation without "a material weakening in the labour market. They still don't think we need one".
In contrast, Ms Ellis said rate cuts needed to come sooner because consumers were "really, really feeling the pinch", a fact she said was masked by high population growth.
Westpac had predicted a rate cut in November prior to Ms Bullock's language shift on Tuesday. Ms Ellis said that was based on similar forecasts to the RBA's, but said the RBA had "a very hawkish state of mind".
"[Interest rates] operate with a lag and you do actually have to start cutting rates before you hit the target. I think the RBA doesn't have a lot of conviction about its forecasts."