Why the RBA did all the work

In FY22–23, the Australian government returned to budget surplus for the first time in 15 years. The surplus was approximately A$22 billion. In FY23–24, the surplus continued at approximately A$9 billion.

This was partly a windfall: elevated commodity export revenues from iron ore, coal and LNG — all benefiting from the same Ukraine war price spikes that were driving inflation — produced extraordinary government revenues. The government was not choosing to run surpluses out of fiscal virtue. The commodity boom was depositing money into treasury.

The macroeconomic effect: the government was running fiscal drag — taking more out of the economy in taxes than it was putting back in spending — simultaneously with the RBA running monetary tightening. Both instruments were suppressing demand at the same time. The question is not whether the RBA was right to raise rates. It was required to by its mandate. The question is why the government deployed no supply-side tools that could have moderated the inflation without requiring 425 basis points of monetary tightening that fell entirely on borrowers.

Government is contributing to the strength in inflation… high levels of public spending as a share of the economy are constraining the recovery in private spending.RBA Governor Philip Lowe, 2023, Paraphrased in AMP analysis

The UK faced the same supply-shock inflation in 2022. It also raised interest rates. But it deployed fiscal tools alongside monetary policy.

In May 2022 — the same month the RBA began raising rates — the UK government introduced the Energy Profits Levy: a 25 per cent surcharge on oil and gas company profits above a threshold. This was subsequently increased to 35 per cent and extended. The levy raised approximately GBP 10 billion. The UK also maintained a bank surcharge above the corporation tax rate throughout the rate cycle.

The EU deployed a solidarity contribution levy on fossil fuel sector profits in 2022–23. Revenue was recycled to support household energy bills across member states. France implemented temporary energy price caps for households. Spain capped household energy prices.

The United States used the Inflation Reduction Act to address some supply-side inflation through clean energy investment and pharmaceutical price negotiation — though it did not introduce a dedicated windfall tax.

Australia’s equivalent: a six-month halving of fuel excise, from March to September 2022. Cost: approximately A$3 billion. Targeted: petrol prices only. Duration: six months. When the excise was restored, prices rose.

While the RBA was raising rates to suppress inflation, the companies whose price increases were contributing to that inflation were earning extraordinary profits. The four major banks reported a combined record profit of approximately A$32.5 billion in FY23 — up 12.4 per cent. Article 5 of this series documents the bank windfall in full.

The fossil fuel companies whose LNG exports were sold at Ukraine war-elevated prices reported record revenues. Santos had not paid corporate tax on A$30 billion in sales in ten years. The PRRT — the gas resource rent tax documented in The Rort’s Gas Series — collected less than beer excise.

Australia also maintained A$14.9 billion in annual fossil fuel subsidies during this period. The government was subsidising the industry whose product price spike was driving inflation while raising nothing from its windfall.

The Australia Institute made the windfall tax argument explicitly: the same geopolitical event (Ukraine war) that was driving inflation for households was driving profits for commodity exporters. A targeted levy on those excess profits would have: raised revenue without raising rates; addressed the specific cause rather than the general demand level; and reduced the burden placed on the RBA. The government chose not to introduce one.

Why did the government not act? The political economy answer: windfall taxes require political will to tax industries with deep donations relationships and economic influence. The banks donated to both parties. The fossil fuel companies’ political connections are documented across the Gas Rort series. The supermarkets’ political relationships were documented in the ACCC inquiry.

Allowing the RBA to carry the entire burden of stabilisation is politically easier than introducing windfall taxes. Rate rises are the RBA’s decision, not the government’s. They are technical, institutional, and at arm’s length. Windfall taxes are government decisions, politically contested, and directly opposed by the industries they target.

The cost of the political convenience was borne by 1.5 million Australian households at mortgage stress. It was borne by renters whose landlords passed on mortgage cost increases. It was borne by workers whose real wages fell while corporate margins expanded.