Simple maths driving our economic malaise

By the Editorial Team · Wednesday, July 8, 2026

Economist Warren Hogan identifies Australia’s economic growth as capped at around 2 percent annually due to a combination of population growth and limited productivity gains, warning that exceeding this rate fuels inflation rather than output expansion. He urges governments to restrain real spending growth to align with this limit, arguing that failure to do so will force the Reserve Bank to rely on higher interest rates, which could harm vulnerable households and hinder efforts to control inflation.

Australia’s economic growth appears constrained to about 2 percent annually, a limit driven by population increases and modest productivity gains, according to economic analysis by Warren Hogan. He explains that combining a 1.5 percent population growth rate with a 0.5 percent productivity improvement results in the economy’s "speed limit" of roughly 2 percent growth. Exceeding this threshold, Hogan warns, risks triggering inflation rather than producing additional goods and services.

Hogan emphasizes that when total demand—stemming from consumers, businesses, and government—surpasses this growth cap, price levels rise instead of output expanding, as supply cannot keep up. In such conditions, inflation emerges as an economic signal rationing scarce resources. Conversely, falling prices typically signal producers to cut back on supply, reflecting a system seeking balance.

For Australian consumers, maintaining equilibrium means stable price movements and manageable living costs. However, Hogan highlights current imbalances, with demand regularly outpacing supply, contributing to broad inflationary pressures. He notes that inflation’s resurgence toward the end of 2025 already indicates that recent large-scale government spending and taxation policies have not succeeded in controlling living costs.

Hogan calls for greater fiscal restraint at all levels of government, asserting that real (inflation-adjusted) government expenditure growth should align with the 2 percent economic expansion rate. He argues that continued government spending growth above this threshold places additional strain on the private sector, potentially exacerbating inflation and economic instability. Hogan suggests even moderating government spending growth to 1 percent could positively influence inflation reduction efforts.

Despite these recommendations, projections indicate that federal government real spending growth is expected to exceed 3 percent again in the current financial year. Hogan cautions this trajectory will challenge the Reserve Bank of Australia’s (RBA) goal of maintaining inflation near its 2.5 percent target unless private sector activity sharply slows. Such a slowdown could undermine investment in productivity-enhancing innovations and labor force development needed to address ongoing cost and supply pressures.

He further explains that if businesses and consumers do not voluntarily curtail spending, the RBA will likely respond by increasing interest rates, a measure that could disproportionately impact vulnerable groups, particularly first-home buyers contending with high housing costs. Hogan criticizes the current policy approach for placing the inflation burden on monetary policy, businesses, and indebted households rather than sharing it across the community through fiscal adjustments.

In summary, Hogan advocates for governments to demonstrate leadership by containing real spending growth, which he views as the responsible step toward stabilizing prices and alleviating the cost-of-living crisis. Without such restraint, he warns, inflation control will remain reliant on restrictive monetary policy with uneven social consequences.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.