Originally published by David Ross of The Australian.
10.06.2026
It might be straight from the Alice in Wonderland fantasy, but the fable of the chocolate biscuit and the Reserve Bank board explains the massive change taking place in Australia following the 2026 budget.
Back in the first week of May, prior to the budget, just one Reserve Bank director – and we don’t know which one – voted not to increase official interest rates.
The other eight Reserve Bank directors voted to increase interest rates and, in my view at the time, headed Australia towards a 1990s-style recession.
My prediction would have taken some time to eventuate, but thanks to the federal budget we are now headed into a severe downturn at a much faster rate.
While it might be a fantasy, a “chocolate biscuit” situation is triggered when one director of the Reserve Bank votes against all the others and that director is proven right. One chocolate biscuit is placed on the tray and the lone director is expected to select it.
But one of the directors, Treasury Secretary Jenny Wilkinson, had inside knowledge because she knew the contents of the budget.
If she was the director who voted against the rate rise then, in all fairness, the chocolate biscuit should remain on the tray.
I hope my readers, including the Reserve Bank board, enjoyed the fantasy, but it’s now down to reality and events are moving very fast.
Bank reactions highlighted that the board member who voted against the May rate increase got it right. Collectively, shares in the big four banks have fallen a staggering 25 per cent from their high points this year.
Westpac reported a 20 per cent drop in new property investor loans and a sharp decline in overall mortgage applications following the budget.
The bank said the sudden slowdown was driven by changes to negative gearing and capital gains tax, which have reduced the ability of borrowers to fund purchases (akin to a credit squeeze), while the absence of negative gearing has hit investor demand.
ANZ chief executive Nuno Matos stunned the share investors by declaring Australian banks should re-enter wealth management and insurance to improve profitability. The banks abandoned those activities in the aftermath of the banking royal commission.
Matos highlighted the steep decline in the big four banks’ return on capital over the past decade because of the narrower suite of services they now offer. He clearly does not believe lower returns from home lending are going to change, so he wants a return to higher-profit areas such as wealth management and insurance.
NAB and CBA were more restrained because they have large business lending books, but both effectively heralded the end of higher interest rates, indicating future moves would be downward.
Business is now all about reducing costs. Outsourcing overseas to reduce costs is skyrocketing; AI comes later. Enterprises are looking for ways to retrench staff and people who have been actively demanding to work from home are often early casualties.
Young people are finding it incredibly difficult to obtain work and the current youth unemployment rate of 11 per cent is likely to rise sharply in coming months. Other enterprises are simply cutting back hours worked, so underemployment is also set to skyrocket.
The fall in the housing market in Melbourne and Sydney has been severe in the $1.5m to $10m bracket, where large numbers of middle Australians have borrowed heavily. Many of these dwellings provide the capital backing for family businesses.
State governments, particularly in NSW and Victoria, are badly managed with inflated costs, but suddenly their main revenue – stamp duty – is set to slump. Pruning will be required and, again, it will be young people who are not hired.
The Commonwealth’s industrial relations legislation has caused a major union fight in the Pilbara iron ore fields and which could continue for months. It will hit government revenue. At stake is the ability to run efficient mines in Australia and, for BHP, the ability to develop the South Australian uranium, gold and copper projects.
One of the best indicators of major downturns is consumer confidence. Consumers often sense disasters ahead of economists, public servants and even Reserve Bank boards.
Leaving aside the Covid-driven technical recession, the last full recession began in 1990. The ANZ-Roy Morgan Consumer Confidence index hit record lows in June 1989 (72.8) and again in October 1990 (71.4).
Unfortunately, the index is again at record lows, both in the months leading into and following Treasurer Jim Chalmers’ 2026 budget.
In the first week of this month the Morgan Consumer Confidence was only 70.8. This is well below the neutral level of 100 and near the record lows reached in April and May this year.
All key indicators are in negative territory, with more Australians expecting to be worse off than better off, and more Australians expecting bad times rather than good times for the economy.
When the Reserve Bank starts to see the economy in decline, lower interest rates will be at the top of the agenda. But hanging over that agenda item will be the fear of inflation.
There is no doubt that we will receive further inflationary shocks from the Iran war. Further down the track there are also clear signs of major power price rises ahead as a result of the trillion-dollar planned investment in high-cost renewables led by the Snowy 2.0.
However, the inflationary repercussions of the Iran war can be isolated, and we now have a very different corporate environment which will find it harder to pass on price rises at a time of falling dwelling prices and the beginnings of a housing-related credit squeeze.
Of course, the Australian dollar may fall if there is any reduction in interest rates that is out of line with world trends. But the 2026 budget tried to do too many things at once and we now have a very different Australian economy and community. One Nation is the winner.
