State and federal government spending is on course to make up a record share of economic activity next year, prolonging the Reserve Bank of Australia’s inflation fight and reducing productivity growth, new Westpac research has found.

With Treasurer Jim Chalmers forecasting a $28.3 billion budget deficit this financial year, Westpac estimates state and federal government spending will hit a record 28 per cent of GDP by the end of 2025, up from the pre-pandemic average of about 22.5 per cent.