Public spending props up the weakening economy

As Jim Chalmers said on Wednesday, GDP growth of just 0.3 per cent in the September quarter was worse than anticipated. He also conceded that many Australians were under substantial financial pressure. The most alarming feature of the national accounts, however, was that the very limited growth recorded was driven by sharply rising government spending, not growth in the productive economy. That trajectory, we have warned several times of late, is already setting the nation on the path to lower living standards. The Australian Bureau of Statistics data spells out the picture. Increases in government expenditure caused the public sector to become an even larger share of the economy, rising to a record 28 per cent of GDP, Jack Quail reports. That compares with an average of 22.5 per cent in the decade before the Covid pandemic. That spending increase, the OECD warns in its new Economic Outlook report, risks adding to underlying inflation and keeping interest rates higher for longer.

In spinning the national accounts data, the Treasurer talked up some policies that were causing the problems. These include cost-of-living handouts and wages growth. The latter should not be a problem in itself but it has not been achieved through productivity gains. And Dr Chalmers’s boast about “more than a million new jobs created” overlooks the unfortunate fact that almost two-thirds of those jobs have been funded by taxpayers, in the public service or government-dependent sectors. But the engine of Australia’s long-term prosperity has broken down, Tom Dusevic writes. The private economy “has been clobbered”, as Deloitte’s Pradeep Philip said.

EY chief economist Cherelle Murphy is not exaggerating when she says the figures “paint a picture of a sad economy without much hope”. Never before had governments pumped so much into the economy via rebates, tax cuts, infrastructure, health and disability support, and defence, she said. That is why the Albanese government – apart from its essential responsibility of boosting defence spending in an increasingly dangerous strategic environment – and the states must reverse course. Spending ever larger amounts of taxpayers’ money on expanding the public service and funding selected projects will not draw private sector investment and encourage the activity that enlarges the revenue base and ultimately improves living standards.

Victoria’s predicament after 10 years of Daniel Andrews and Jacinta Allan illustrates the point. Our second most populous state’s dismal budget performance and anti-competitive policies have made it the worst place in the nation to do business. Spending splurges have worsened the outlook. And Queensland is facing a “heightened risk” of a credit rating downgrade, with Treasurer David Janetzki being advised by his department that the state had a “significant and growing debt burden that won’t stabilise”. The Crisafulli government, regardless of its naive promise to implement Labor’s budget, must invest political capital imposing fiscal discipline and improving the business environment before Queensland heads further down the Victorian path.

Dr Chalmers’ essay published almost two years ago about creating a new values-based capitalism through greater intervention is proving a furphy. The national accounts and the OECD’s forecast of modest growth of just 1.9 per cent next year are a challenge to the major parties to devise an economic narrative as Bob Hawke, Paul Keating and John Howard did almost 40 years ago, in different ways, to set the nation up for decades of prosperity. Dr Chalmers and opposition Treasury spokesman Angus Taylor need to show that overarching challenge is not beyond them.