Railway lines and government pay rises keeping economy afloat

Only a $6 billion increase in government spending on everything from childcare subsidies to railway lines is likely to have kept the economy afloat over the past 12 months as households struggle to deal with cost-of-living pressures.

Despite concerns about the inflationary impact of government expenditure, figures to be released by the Australian Bureau of Statistics on Wednesday are tipped to show spending by federal, state and local governments offsetting weakness in the private sector and among the nation’s consumers.

Sydney’s $21.6 billion Metro extension is among the state government infrastructure works supporting the economy.Credit: Louie Douvis

Economists expect the national accounts to show the economy expanded by about 0.3 per cent through the June quarter, taking annual growth below 1 per cent since the middle of 2023.

Partial data released on Tuesday revealed the importance of public spending, which is likely to account for almost all the growth in the June quarter.

Commonwealth Bank senior economist Belinda Allen said a 3 per cent lift in state and local government spending, and a 5.3 per cent jump in national defence expenditure, had supported the economy through the quarter.

She said over the past year, the economy had probably grown by 1.1 per cent, of which public spending accounted for almost a full percentage point.

The main driver of government spending through the past year was expenditure on social assistance programs and benefits, which increased by 5.8 per cent. Spending on aged care alone jumped 32 per cent, or $7 billion. The single largest factor in this sector was an increase in wages for nurses and aged care workers.

Disability spending increased by 20 per cent, or $6.9 billion, largely due to the increased cost of the National Disability Insurance Scheme, while health spending rose 6 per cent, or almost $3 billion, in part due to extra medicines being added to the Pharmaceutical Benefits Scheme.

The government’s changes to childcare subsidies lifted spending on family benefits by 25 per cent, or $2.7 billion.

Spending by public corporations such as the nation’s state government-owned rail authorities increased to $6.5 billion, partially offsetting a fall in federal government capital spending by its public agencies. Major projects such as Sydney’s Metro, whose $21.6 billion Chatswood to Sydenham extension opened last month, and Melbourne’s $14 billion Metro Tunnel, which is close to finalisation, are among the state government infrastructure works supporting the economy.

As a share of the economy, government spending will approach the record levels hit during the pandemic.

The stronger than expected lift in government spending offset a subdued export sector, which suffered from a sharp drop in prices for commodities such as iron ore and coal. The total volume of overseas sales was also down.

But service exports lifted by 5.6 per cent, mainly due to the foreign students in the nation’s schools and universities. Net exports are expected to add 0.2 percentage points to Wednesday’s result.

Treasurer Jim Chalmers said he was not expecting strong growth in the June quarter as a combination of global uncertainty, high interest rates and ongoing cost-of-living pressures hit the economy.

Peter Dutton says central banks in other countries are cutting interest rates but Australia cannot as inflation remains sticky.Credit: Rhett Wyman

He defended himself against Coalition attacks that he was trying to deflect attention from his management of the economy by highlighting the impact of interest rate settings on consumers.

“I think it would be strange really, if the treasurer of Australia couldn’t say to the Australian people, ‘our economy is slowing and here are some of the reasons why it’s slowing, including higher interest rates’,” he said.

Opposition Leader Peter Dutton accused the government of losing control of the economy, saying high public spending meant inflation was not falling as it was in other countries.

“People know that interest rates have gone down in the UK, in Canada and in New Zealand, but they’re still sticky here,” he said.

The NZ, Canadian and English central banks have all cut official interest rates in the past three weeks. But at 5.25 per cent, 4.5 per cent and 5 per cent respectively, their cash rates are still higher than in Australia, where the Reserve Bank has held official interest rates at 4.35 per cent since November.

Senior ANZ economists Catherine Birch and Adam Boyton said household spending was expected to have been weak through the June quarter.

But this should improve in the second half of the year as the stage 3 tax cuts and various cost-of-living relief measures boosted household disposable income.

Ahead of Wednesday’s figures, financial markets were expecting the Reserve Bank to start cutting interest rates from February.

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