Is Government Spending Behind the RBA Rate Rise? Pre- vs Post-COVID Data and What It Means for Melbourne Mortgages

Is government spending behind the RBA's latest rate rise? The honest answer is partly, but not mainly, according to the Reserve Bank's own words. On 29 September 2026, the RBA lifted the cash rate to 4.60%. It pointed to Middle East energy prices, AI-driven technology prices and domestic capacity pressures. Its statement did not mention fiscal policy. Public spending, however, now makes up a much larger share of the economy than it did before COVID.

Overnight, the debate became political. The Treasurer blamed the Middle East war, and the Opposition blamed what it called a government spending addiction. This article sets out what the numbers actually show, from before COVID to now. We also explain why it matters for your mortgage if you live in Melbourne.

What Did the RBA Say Caused the September 2026 Rate Rise?

In its 29 September 2026 statement, the RBA said the upside risks to inflation it had been flagging are now materialising. It identified three pressures:

• Energy: higher global energy prices as the Middle East conflict broadens.
• Technology: AI-related demand pushing up technology goods prices worldwide.
• Capacity: ongoing pressure on the economy's domestic capacity.

The statement does not mention government spending or fiscal policy. Governor Michele Bullock's opening statement to the House Economics Committee on 18 September also made no direct reference to fiscal policy, although she said a period of subdued growth in aggregate demand is needed.

That does not mean spending is irrelevant. At a House Economics Committee hearing in February 2026, Bullock listed government spending among several contributors to inflation, alongside low unemployment, rising real incomes, lower interest rates and tax cuts, according to ABC News. She also said it was not her place to judge the government's fiscal settings. In short, the RBA takes public demand as a given and sets the cash rate for everything else.

Is Government Spending Causing Inflation in Australia?

Government spending adds to total demand. When demand outpaces the economy's capacity to supply, prices rise. The RBA's view is that spending is one contributor among several, not the main driver of the latest rise. Economists are divided on how big its role is, and the answer depends partly on whether you look at levels or growth.

The case that spending is adding to pressure

On levels, the public sector is bigger than before COVID. EY economists estimated public demand at 28.9% of the economy in the June quarter 2026. A year earlier, they compared that share with a 10-year pre-pandemic average of 22.8% (EY, 2 September 2026). CBA chief economist Luke Yeaman wrote this month that structurally higher federal and state spending limits how much room private demand has to grow without adding to inflation. KPMG's Brendan Rynne, quoted by AAP on the day of the decision, warned that continued government spending could push the cash rate higher still. Shadow Treasurer Tim Wilson went further in a 29 September statement. He said spending is at its highest share of the economy since 1986–87 outside the pandemic years.

The case that spending is not the main culprit

On growth, the picture is more modest. The ABS June quarter 2026 national accounts show public demand added just 0.1 percentage points to growth. Government consumption rose 2.0% over the year. Treasurer Jim Chalmers noted that four in every five dollars of domestic demand growth came from private, not public, demand. The RBA's August Statement on Monetary Policy said recent budgets have not materially changed its outlook for public demand. Government energy rebates and fuel excise relief also lowered measured inflation while they were in place. The ABS noted that the rebates ending has since helped push electricity prices higher.

What was said after the decision

At her press conference on 29 September, Governor Bullock declined to blame any one factor. As reported by the ABC, she said inflation was not only about the Middle East conflict, because the economy "did start from a position of excess demand anyway". She did not single out government spending. Overnight, Opposition Leader Angus Taylor said households have tightened their belts while the government has not. Treasurer Chalmers said he accepts responsibility for his part in the fight against inflation and pointed to international factors (ABC, 30 September 2026). In a separate analysis, ABC business editor Michael Janda noted that Australia's deficit sits mid-pack among OECD nations.

Both sides make valid points. Public spending is structurally higher than before COVID, but it is not currently the fastest-growing part of the economy.

Australia Before and After COVID: The Numbers Side by Side

The table below compares key measures from before the pandemic with the latest published data. Each figure comes from the source named.

Pre-COVID and latest periods differ by measure as shown. Budget figures are Commonwealth general government; Victorian figures are general government sector net debt. Figures are as published and may be revised.

A few things stand out. Headline GDP growth is similar to pre-COVID rates, but the cash rate is six times higher. The federal government collects and spends a larger share of the economy than before the pandemic. Federal net debt as a share of GDP, however, is broadly where it was in 2018–19, according to the 2025–26 Final Budget Outcome. The 2025–26 deficit also came in $6.0 billion smaller than forecast at the May Budget. Households are saving almost twice as much of their income, which suggests many are being cautious.

What About Victoria's Government Debt?

Victoria's position has changed more than the Commonwealth's. The state's Parliamentary Budget Office put general government net debt at 5.5% of gross state product in 2018–19. The 2026–27 Victorian Budget forecasts net debt of $175.6 billion (24.9% of GSP) in 2026–27, rising to $199.3 billion by 2029–30. It also forecasts small operating surpluses.

State debt does not set the cash rate. The RBA looks at total demand across the economy, and state infrastructure and service spending is part of public demand. In its August Statement, the RBA noted that some state government investment plans had increased. For Victorian households, the more direct links are state taxes and charges and the pace of the Big Build. Our Melbourne mortgage broker team sees how these shape borrowing decisions every week.

Would Cutting Government Spending Lower Mortgage Rates?

It could reduce pressure on rates over time, but there is no simple dollar-for-dollar link. With less public demand, the RBA would need less restraint on private demand to reach its inflation target. A 2024 Parliamentary Library paper cited economist Chris Richardson's rule of thumb that about $7 billion of extra spending is roughly worth a 0.25% move in the cash rate. That estimate is dated and indicative only. What happens next still depends mainly on inflation data. The August monthly CPI is due from the ABS at 11:30am today, 30 September, and the September-quarter CPI follows in late October, ahead of the RBA's early-November meeting.

Economists disagree about whether more rises are coming. Some expect another increase before Christmas; others think the current setting may be enough. We don't make rate predictions, and anyone offering certainty should be treated with caution.

What Does This Mean for Melbourne Mortgage Holders?

Whatever the cause, the cost lands in the same place: your repayments. Lenders are expected to adjust variable rates over the next 14 days following the September decision. Exact timing varies by lender, and your lender will notify you. We set out illustrative repayment changes and a full checklist in our RBA rate decision explainer.

• Plan for rates to stay higher for longer. If public demand keeps running at a higher share of the economy, the RBA may need to hold private demand back for longer.
• Check your rate against new-customer rates. Existing customers often pay more, so a refinancing review can be worthwhile.
• Re-test your borrowing power before bidding. Serviceability buffers mean each rise reduces what lenders will approve, so try our borrowing power calculator.
• First home buyers should confirm scheme eligibility and price caps on our first home buyer loans page.
• Investors should review cash flow and structure (see investment loans), and speak with an accountant about tax.

IFG's Take

I started in business banking at NAB in 2003, and every rate cycle since has come with a debate over who is to blame. That debate matters for policy, but it doesn't change your repayment this month. What helps is knowing where you stand: your rate, your buffer, when your fixed term ends, and how much you could borrow today.

That is the work we do every day for clients across Melbourne's north and west, from Essendon and Moonee Ponds to Coburg North. If you'd like a clear view of your own position, start at our home page or book a free call.

Frequently Asked Questions: Government Spending and the RBA Rate Rise

Is government spending causing inflation in Australia?

It is one contributor. Government spending adds to total demand, and the RBA Governor has listed it among several drivers of inflation. For the September 2026 rise, however, the RBA named energy prices, AI-driven technology prices and domestic capacity pressures, and said recent budgets had not materially changed its public demand outlook.

How big is government spending compared with before COVID?

Commonwealth payments were 26.9% of GDP in 2025–26, compared with 24.6% in 2018–19, according to the Final Budget Outcomes. EY estimates total public demand at 28.9% of the economy in the June quarter 2026, against a 10-year pre-pandemic average of 22.8%.

Did the RBA blame the government for the September 2026 rate rise?

No. The RBA's 29 September 2026 statement does not mention fiscal policy. It points to higher global energy prices, technology price pressures linked to AI demand, and ongoing domestic capacity pressures.

Would lower government spending bring mortgage rates down?

It could ease pressure on rates over time by reducing total demand, but there is no fixed link. Future RBA decisions will mainly depend on inflation data, including the September-quarter CPI in late October.

When will my home loan rate change after the September rise?

Lenders are expected to adjust their variable rates over the next 14 days following the 29 September decision. Timing varies by lender, and your lender will notify you of any change. Fixed rates are unaffected until the fixed term ends.

This article is general information only and does not constitute financial, credit, tax or legal advice. It does not take into account your objectives, financial situation or needs; consider whether it is appropriate for you and seek personalised advice before acting. Economic data is attributed to its publishers and refers to the periods stated; it may be revised. Views attributed to the RBA, government, opposition, economists and other commentators are theirs, as published, and are not predictions or political positions of Integrated Finance Group. Integrated Finance Group’s brokers are Credit Representatives of BLSSA Pty Ltd, Australian Credit Licence 391237. All credit applications are subject to lender assessment and approval. Our Credit Guide is available on request. Tax questions should be directed to your accountant.