Public sector growth is taxing households

The private sector has struggled, with household consumption showing little growth and business investment and spending on housing construction both falling.

Not since the Rudd government’s stimulus programs in the midst of the global financial crisis has the economy been so dependent on government spending to support growth.

Spending by federal and state governments on public servants, benefits and infrastructure rose by 6.2 per cent over the past year and accounted for 1.4 percentage points of the 2.3 per cent growth in the overall economy.

For the federal government, the National Disability Insurance Scheme has added to outlays that were 10 per cent higher in the December quarter than a year earlier while state spending on infrastructure was up by 12.5 per cent.

By contrast, the private sector has struggled, with household consumption showing little growth and business investment and spending on housing construction both falling.

UBS strategist Matthew Johnson says the private sector was in recession over the latter half of 2018, contracting by 0.9 per cent, while the public sector was growing at an unsustainable annual rate of 7.3 per cent.

The picture should not be as bleak over the year ahead.

The downturn in investment in the resource sector is at an end while the rest of the corporate sector is planning to lift spending.

The effect of the drought on exports should fade, and new LNG plants will kick in. The influx of tourists and students should continue. Yet it is hard to see what will lift growth out of the doldrums. Increased government spending doesn’t really help when it is being matched by increased taxes.

It is notable that while total pre-tax wage income in the December quarter was 4.2 per cent higher than a year earlier, individual tax payments were 9.7 per cent higher.

Commonwealth Bank economists calculate that after allowing for inflation and tax, real incomes per household fell 1 per cent over the past year. It is no wonder that consumption has been weak.

Rising tax revenues may be speeding the federal budget’s return to surplus but they are leaving households in deficit. Tax cuts would help.