Green shoots in economy need good policy to grow

Amid daunting challenges such as national debt soaring towards $1 trillion, Wednesday’s national accounts revealed promising green shoots, with potential for building economic momentum in 2026. It will be a crucial year for business and for government policy that will shape growth and living standards for years. On the positive side, Australian Bureau of Statistics data showed private investment, as well as ongoing government spending, took the annual growth rate to 2.1 per cent in the year to the end of September. In an encouraging sign, private investment grew 2.9 per cent, contributing 0.5 per cent to GDP growth. The ABS noted: “This is the highest rate of quarterly growth seen since March quarter 2021. Business investment in machinery and equipment (+7.6 per cent) led the rise, with strength attributed to major data centre investment” across NSW and Victoria. But economists warn that more public spending than necessary is pushing the economy to its capacity, risking higher inflation and an interest rate hike next year. The improvement is fragile, with weaker-than-expected growth of 0.4 per cent during the September quarter, when construction and housing was one of the strongest sectors.

In 2026, business confidence and productivity will be key determinants of growth and living standards. Productivity lifted 0.8 per cent for the year and 0.2 per cent for the quarter, showing the ongoing need for improvement as firms struggle to overcome capacity constraints and business inventories run down as miners and retailers meet export orders. Businesses increasingly are looking to artificial intelligence to kickstart GDP per hour worked, with the government’s AI strategy, which is light on regulation, winning widespread approval from industry groups.

Jim Chalmers welcomed business investment and investment in homes picking up pace in the national accounts. Private demand had now contributed more to growth than public demand for four consecutive quarters, the Treasurer said. Growth was the best way to improve living standards, which required the economy to become more productive and resilient, and the budget more sustainable. Dr Chalmers also pointed to the workforce participation of more than two-thirds of the working-age population. But he cannot ignore the weakness that in a buoyant jobs market 991,540 working-age Australians are relying on JobSeeker and Youth Allowance (Other) payments, as Geoff Chambers reports. It is bad for them and for the nation.

The need for more disciplined spending at federal and state levels was clear on Wednesday when Reserve Bank governor Michele Bullock confirmed that increased budget deficits could lead to higher interest rates, adding to the problems of household and business borrowers. At Senate estimates, Ms Bullock was quizzed about whether higher government spending would mean interest rates would need to be higher. The potential correlation was reported in The Australian by Matthew Cranston last week after the head of the RBA’s international department, Penelope Smith, said Australia’s neutral interest rate – the conceptual rate that keeps growth at potential and inflation in target – can be influenced by the budget bottom line. “Factors that could push neutral rates higher include growing fiscal deficits,” Ms Smith told the Australian Securitisation Conference. Ms Bullock confirmed the link: “All other things equal, if there are less savings in the economy – and that includes by the government as well as private sector – and at the same time investment doesn’t come down, then that would put upward pressure on the neutral rate.” But she emphasised “there’s domestic factors here, but there’s also global factors … we don’t control global factors”.

While the federal budget, with a $42bn deficit, is expected to remain in the red for a decade, the OECD is advocating fiscal consolidation to stabilise debt. OECD secretary-general Mathias Cormann said fiscal discipline was necessary to tackle high and rising public debt and maintain capacity to react to future shocks. Official figures on Tuesday showed total Australian government borrowing hit $42bn in the September quarter, up from more than $30bn in the corresponding quarter last year – a 40 per cent increase. Borrowing is at levels recorded in 2021 during the pandemic.

While committing to spend only what “we can afford”, Dr Chalmers confirmed the government would decide in coming days on federal energy bill rebates, due to expire at the end of the year. The handouts were never meant to be permanent and should be dumped. Power prices cannot be funded through borrowings, paid for by taxpayers, indefinitely. Reliability of energy supply and affordability will be an increasingly important influence on investment, growth and business confidence. The issue of power prices undermining small businesses, reported this week, has been confirmed by the Council of Small Business Organisations Australia and CommBank 2025 Small Business Perspectives Report. Almost two-thirds of small business owners reported lower profits than last year, with more than half unable to pay themselves. The lesson, as with national accounts and inflation warnings from the RBA and the OECD, is that good policy is essential to growth and prosperity but government spending must be curtailed. The necessary economic agenda for 2026 is clear.