Public service wage growth twice that of inflation as RBA warns public is losing faith in central bank

Australia’s public service wages bill is growing at double the pace of inflation - undermining Labor’s claim the Middle East oil crisis is fuelling the cost-of-living crisis.

With the Federal Government under increasing pressure to cut spending, new official data has revealed the Commonwealth’s wages bill grew by 7.2 per cent during the last financial year - or almost double the inflation pace of 3.8 per cent at the time.

This marked a $2.9 billion increase to $43.8b, as spending on public sector jobs at the State and Territory level grew by 6.6 per cent or $12.6b to $203.8b, new Australian Bureau of Statistics data showed.

The care economy is particularly costly with health care and social assistance wage costs climbing by 8.5 per cent, or $5.5b, covering State and Federal Government programs.

The 4.4 per cent annual growth in new care jobs was also more than double the 1.7 per cent increase in the overall labour market.

The Reserve Bank’s deputy governor Andrew Hauser, meanwhile, has warned the public’s trust in the RBA was waning following a fifth hike since February on Tuesday.

“Trust in the RBA seems to have held up through a difficult period but the warnings are clear: some people’s confidence in delivery, particularly on inflation, has fallen,” he said.

Waning trust in the RBA’s ability to get inflation under control could see businesses raise their prices, prolonging Australia’s inflation crisis.

“Business are inclined to pass on more of the cost increases, expecting that a slow policy response will allow cost pressures to persist and demand to keep expanding,” he told an audience at Australian National University on Thursday night.

“And employees are minded to seek higher wages. The temporary cost shock risks becoming embedded in prices and wages.”

Mr Hauser warned this scenario could potentially lead to even higher interest rates, two days after the RBA’s monetary policy board he is part of decided six votes to three to raise the cash rate to an 18-year high of 4.85 per cent.

“To bring inflation back promptly, the central bank must raise rates quite aggressively, contracting demand sharply,” he said.

Mr Hauser cited data from the Reserve Bank’s business liaison program and Macquarie University’s Business Outlook Scenario Survey showing fewer firms see inflation falling within its 2-3 per cent target within the next five to 10 years.

“Domestic prices and wages are set by companies and households, not financial markets - and here the evidence is less reassuring.

“Some contacts in the RBA’s liaison program say similar things.”

Australian consumers were likely to also have a pessimistic view of inflation, with both measures remaining above the RBA’s target band in September for the 14th straight month.

“Australia currently has no reliable measure of households’ longer-term expectations, but their deep concern about inflation suggests they might feel somewhat similarly.”

The Liberal Party’s deputy leader Jane Hume said Labor was to blame for inflation staying high.

“The Labor Government takes no responsibility for the consequences of its spending, which is keeping inflation and interest rates higher than longer,” she told The Nightly.

“It continues to deny that its record size public service – which has on average grown by 28 public servants in day – contributes to the problem.

“Today’s data showed the public service wages bill continues to grow at an extraordinary rate of 7 per cent, yet the Budget books have a declining wage bill. It simply doesn’t add up.”

Non-tradables inflation linked to goods and services made in Australia has, since 2023, been consistently higher than tradable inflation flowing from the price of imports, despite the wars in Ukraine and Iran.

Dr Naoise McDonagh, a senior lecturer in trade and geopolitics at Edith Cowan University, said this suggested inflation was a homegrown problem exacerbated by high government spending and not the Middle East oil crisis.

“Domestic inflation is due to government spending ramping up the cost and capacity constraints within the domestic economy and crowding out private capital in ways that are non-productive, reducing Australia’s productivity because the public sector traditionally isn’t as productive as the private sector,” he told The Nightly.

“The Government has tried to blame the war in Ukraine and the Iran conflict as a primary source of inflation, that’s not true.

“Obviously, it’s having an impact but it’s in the minority side of the ledger.”

Dr McDonagh said the flood of more affordable Chinese goods into Australia, including electric cars, was keeping a lid on imported inflation.

“They’re being flooded into the market because China now doesn’t consume enough of it’s own EVs at home - in Australia that’s great for consumers,” he said.

Despite talking up the Middle East crisis, Treasurer Jim Chalmers is resisting any call to revive fuel tax relief that was in place from April to August.

“The four-month cut to fuel excise helped take the sting out of the big peaks in fuel prices caused by the start of the war in the Middle East – but it was never intended to be permanent,” he told The Nightly.

“We recognise people are under pressure and that’s why we have more, permanent relief rolling out with tax cuts, higher wages, extra paid parental leave and more that is also helping with the cost of living.”

Crude oil prices have this month fallen back below $US100 a barrel, down to $US87 a barrel, and could fall further after US President Donald Trump’s Republican Party was decimated in Senate and House races.

Robert Monterosso, a research fellow with the United States Studies Centre’s economic security program, argued Democrat control of the US Congress could result in cheaper diesel prices for Australian motorists as these lawmakers used their numbers to restrict financing for the Iran war.

“They might approve funding but attach different bargaining chips involved so hypothetically they could fund the war in Iran but with concessions made elsewhere from tariffs or on healthcare for example,” he said.

“The Democrats, they’re focused on getting costs of living down, diesel prices are a big part of that and a big part of that is the war in Iran so there’s potential for there to be a slowdown in the war in Iran.

“Any de-escalation in the Strait of Hormuz would likely lead to a pretty big drop in crude oil prices - it’s a global market so when prices are lower in the States, they’re usually lower globally, particularly because the States is the largest exporter of diesel and crude oil.”