Smashed? Governments are living large, while ailing voters are left to pick up the pieces

The national accounts are a wake-up call for all Australians. The economy has split apart, as consumers are battered by inflation while governments are on a spending spree.

RBA governor Michele Bullock gives a speech on the costs of high inflation at an Anika Foundation luncheon. Picture: NewsWire / Max Mason-Hubers

Like John Maynard Keynes, John Kenneth Galbraith was a giant of a man, more than 2m tall, and an extremely influential figure in economics back in the day, which was America in the 1950s and ’60s. It was the era of JFK, LBJ and MLK; the Cold War, social tumult, the “war on poverty” and the civil rights movement, amid the long post-war expansion that spawned the boomers and the Me Generation.

Once a bestselling author, Galbraith has long fallen out of fashion, but he did provide a handful of easy-to-grasp concepts that changed popular perceptions and influenced the direction of US public policy. It’s likely Anthony Albanese would have imbibed a fair bit of so-called institutional economics, a gateway to the Marxist critiques of capitalism, in the political economy stream at the University of Sydney in the turbulent ’80s.

One of Galbraith’s memorable phrases was the notion of “private opulence and public squalor” that was at large during Roman times but was revived by the economist in The Affluent Society (1958). That book was a sharp take-down of consumerism and the power of big business, while calling for a new wave of public spending on infrastructure and education.

To flip Galbraith’s idea in Albo’s Australia, we may be living through a transition period that is leading to public opulence and private squalor.

Big government and Big Australia are stoking the growth engine, but at the cost of higher debt, more urban congestion and intergenerational stress fractures.

This week’s national accounts for the June quarter confirm an economy that has split apart: consumers are being battered by inflation while governments are on a spending spree. The headline figure was a 0.2 per cent increase in gross domestic product in the quarter, meaning annual output growth was a mere 1 per cent – the weakest result, outside of a crisis, since the recovery from the early ’90s recession engineered by the Reserve Bank to pop the bubble economy of the era’s credit-crazy boom.

Annual population growth is booming at 2.5 per cent, overwhelmingly due to a record inflow of foreign students with work rights, meaning an extra 660,000 consumers who also need a place to live. Westpac economists have noted that Australia has now recorded six consecutive quarters of declining per capita GDP, which is the longest stretch on quarterly estimates going back to 1959. Consumer spending per person also has fallen for six straight quarters.

The Commonwealth Bank’s head of Australian economics Gareth Aird says the nation’s economic pulse “is incredibly weak”, while KPMG chief economist Brendan Rynne describes the latest national accounts as a “pretty sorry picture”.

True to form, Jim Chalmers has claimed total vindication for his economic strategy, which in the words of the self-marker was “carefully calibrated for the conditions”. Our front page headline guru on Thursday said it all: But for Jim, it’d be grim.

The front page of The Australian on Thursday, September 5.

“It is only migration and high government spending that is propping up growth at all,” Rynne says. “And government spending means labour-intensive public sector expansion crowding out the more capital-intensive private sector. It is a story of a two-speed economy – the private sector of the Australian economy is going backwards while the public sector is spending big.

“Clearly this is not sustainable and is effectively taking from Peter to pay Paul. High government spending is also hampering the RBA’s efforts to control inflation.”

A new policy paper this week by Robert Carling, a senior fellow at the Centre for Independent Studies, documents the rise and rise of the spendthrift state, and its incendiary role in today’s elevated and caustic inflation.

Carling argues public sector demand is clearly contributing to a situation where the economy’s supply capacity can’t keep up with overall demand in the economy – a point made forcefully by the RBA after last month’s board meeting.

Government demand, which takes in consumption and public works, “has been growing at rates above the long-term average before and since the pandemic, as well as during it”, writes Carling.

Across nine years to the end of June this year, public final demand has increased by a cumulative 55 per cent.

“After such a long expansion, even if growth of public demand moderates now, its level will remain high,” Carling argues.

With the exception of the two years straight after the end of the Covid crisis, when consumers hit the shops and restaurants and splurged some of their forced savings, “private final demand growth has been tepid while public sector demand has been strong”.

“There are signs of a structural realignment of the economy in favour of a larger public sector, which is crowding out the private sector,” Carling writes. “Even if inflation eases back to the target, this structural realignment will raise concerns about the implications for future taxation, public debt and productivity growth.”

EY chief economist Cherelle Murphy says the use of government spending to prop up the economy has been a factor driving the national statistics for some time; public spending is now at a record 27.6 per cent of GDP.

Social benefits from Canberra last financial year increased by 15.8 per cent.

Murphy says this reflects several impacts, including higher award wages for nurses and aged-care workers; a 20.1 per cent increase in disability benefits; increases in the indexation rate for the Medicare Benefits Schedule; changes to bulk billing incentive payments and Pharma­ceutical Benefits Scheme listings; and the higher Child Care Subsidy rates. State and local government expenditure also rose with higher employee expenses.

“Budget papers show that government spending – across the commonwealth and states and territories – will be even greater in the future, and debt will be used to pay for it,” Murphy says. Net debt across the consolidated general government sector, which is currently around 30 per cent of GDP, is expected to rise to 34 per cent by mid-2027. It was 19.3 per cent in the financial year before the pandemic.

That collective fiscal footprint of Canberra, the states and territories, which has been growing under both sides of politics for a generation, leaving aside financial and health crises, is also a drag on national productivity, which has been stagnant since 2016.

Despite a slowing economy, which the Treasurer alleges has been “smashed” by the RBA’s interest rate squeeze, the jobless rate is 4.2 per cent, only slightly up from its five-decade low of 3.5 per cent during the second half of 2022. A million more people are in work since Labor came to power.

Yet there’s a downside to the bright side. KPMG’s Rynne says declining productivity represents businesses holding on to labour while not selling enough to justify their roles. “This is not sustainable given falling profits, and the impact will be businesses starting to shed labour more seriously over the next six to 12 months to get better balance between outputs and inputs,” Rynne says.

Aird, too, points out that productivity growth “remains a challenge largely in the non-market sector”. He says that since the pandemic total productivity growth in the economy is down a touch. But within the market sector it is actually up by 2 per cent.

“The implication is that solving the productivity ‘challenge’ in the economy sits with the government looking for policies that boost output per worker within the public sector,” he said after the national accounts release.

“The private sector has been doing a better job on the productivity front.”

EY’s Murphy brings this troubling dynamic together in the context of the rising cost of wages to employers. The so-called supply side is malfunctioning as unit labour costs, which feed inflation, continue to rise.

“This is the worst possible combination of statistics, as it means Australian businesses are gaining very little from government spending, which is focused on short-term cost-of-living relief for households and Band-Aid fixes to neglected problems,” she says. “For the private sector, there’s a lack of encouragement to invest for our long-term prosperity.”

The bottom line from the national accounts, says Murphy, is that the RBA needs to keep interest rates where they’ve been since last November. Plainly, the lack of co-ordination between budget policy and monetary policy means the journey to low and stable inflation “is slower than it needs to be”.

On Thursday, RBA governor Michele Bullock rose above the custodian’s pre-emptive political trash talk about interest rates at the start of the week and made an eloquent statement about how inflation remained the enemy of the people – workers, employers, savers and borrowers, “absolutely everyone”.

It’s hardship all around, Bullock says, especially for young people, low-income earners, mortgaged families with no buffers and the poor. While assuring the public the bank is not “at war” with the Albanese government, the RBA governor also has made it clear that the board is not for turning.

Monetary policy, Bullock says, will remain restrictive until inflation is moving back sustainably to the 2-3 per cent target zone.

“It is premature to be thinking about rate cuts,” the governor says. “With underlying inflation having fallen very little over the past year in quarterly terms, the board is vigilant to upside risks.”

If it means another rate hike, and more job losses, that will be regrettable and painful – but necessary to rub out the foe that is smashing our economy and threatening further decline in what should be, on any measure, an affluent society.