Australia’s government spending has been rising at an accelerated pace in recent years, prompting debate over its role in driving inflation amid a cost-of-living squeeze. The opposition has accused the Labor government of “out-of-control” expenditure contributing to higher prices for families and small businesses, while economists caution the issue is more complex.
Recent data showed inflation rose to 4.3% in the year to September, up from 4.0% the previous month, with fuel prices playing a significant role. Underlying inflation, which excludes volatile items like energy costs, also increased to 3.7%, both figures well above the Reserve Bank of Australia’s 2.5% target. These pressures have heightened the likelihood of another interest rate hike.
Examining government spending, total expenditures are projected to climb by 30% between 2021-22 and 2025-26, according to analysis by the parliamentary budget office. Even after adjusting for inflation, federal outlays are expected to rise by 5.5% in 2024-25 and 4.3% in 2025-26. Experts identify several key drivers behind this growth.
Stephen Bartos, a University of Canberra professor and former deputy secretary at the finance department, highlights defence spending as a significant factor amid evolving geopolitical tensions. The national disability insurance scheme (NDIS) is another major contributor, with the government targeting a growth rate that remains double the economy’s expansion. Health expenditure, expanded during the COVID-19 pandemic, continues to increase due to enhanced pharmaceutical benefits and new hospital funding arrangements. Additional increases are seen in broader care services and rising interest costs on the national debt.
Public spending as a share of GDP is now at its highest level outside the pandemic years, reaching levels not seen since the early 1980s. However, Stephen Smith, a partner at Deloitte Access Economics, argues that this fiscal expansion reflects structural changes rather than government overspending per se. He notes that contemporary economic challenges and growing demands for government involvement in sectors like care have necessitated increased spending.
Smith cautions that the budget’s fiscal stance, rather than sheer spending size, influences inflation. A government running a deficit injects demand into the economy, potentially heightening inflationary pressures, while surpluses withdraw it. Australia is forecast to record deficits approaching $10 billion in 2024-25 and over $22 billion in 2025-26, with a $31.5 billion shortfall expected for the current financial year. These deficits may exacerbate inflation challenges and complicate the Reserve Bank’s monetary policy decisions.
Nevertheless, recent inflationary spikes are heavily influenced by external factors, particularly a 24% rise in fuel prices over the year to September driven by global uncertainties. The transport sector alone accounted for one percentage point of the headline inflation figure.
Debate continues over whether high government spending hampers economic dynamism or fuels inflation. Bartos dismisses concerns about a direct link, citing examples like Sweden where high public spending coincides with strong economic performance. Smith concurs, suggesting that while some crowding-out effects may occur, especially in infrastructure, the overall impact on economic growth and inflation is not definitively established.
The ongoing dialogue reflects the complexities of balancing fiscal policy, economic growth, and inflation control amid shifting domestic and international conditions.