Federal and state government spending boom hits new high

Government spending has hit its highest level ever on the back of living-cost relief, rapid expansion of the care sector and public servants’ wage hikes.

State and federal government spending has hit a fresh record high. Picture: NewsWire / Martin Ollman

Government spending has hit its highest level ever on the back of living-cost relief, rapid expansion of the care sector and public servants’ wage hikes, with Jim Chalmers arguing the splurge is keeping the nation out of recession even as it threatens to keep interest rates higher for longer.

As Labor faces calls to ramp up household support ahead of the looming election, public demand – a proxy for federal and state government outlays – rose by 2.4 per cent in the three months to September, the Australian Bureau of Statistics said on Tuesday.

With Wednesday’s national accounts expected to show Australia’s GDP expanded by a meagre 0.5 per cent in the September quarter, the continued strength of government spending on services and capital works means the public sector will account for an even larger share of the economy, rising to approximately 27.9 per cent.

That compares with 27.3 per cent of GDP in the June quarter, and up from an average of 22.5 per cent recorded in the decade prior to the pandemic, amid ballooning costs for federal social programs, including aged care and the NDIS.

Responding to the fresh figures, the Treasurer, who has steadfastly defended voter giveaways by premiers in the past, pinned the surge in public outlays on big-spending state governments and an increase in defence projects over the quarter.

“We have been making encouraging progress on inflation without ignoring the serious risks to growth in our economy,” Dr Chalmers said. “Growth would be even weaker without the contribution from public demand.”

But economists warned that the record public spending risked stoking inflation, currently 3.5 per cent on the Reserve Bank’s preferred underlying gauge, and threatened to further delay interest rate cuts, which investors do not expect until May.

“Government spending, both commonwealth and state … is adding aggregate demand to the economy,” EY chief economist Cherelle Murphy said.

“When you’ve got an economy that’s capacity constrained as it is, then that is going to be inflationary.”

To cover the tab of its spending boom, government borrowing tripled across the September quarter to just short of $40bn, the largest quarterly increase since 2021, when state and federal budgets were stretched by pandemic-era lockdowns and restrictions.

State and local governments accounted for $18bn of the borrowing, while $14bn came from the federal government. Public corporations accounted for the remaining share.

Westpac senior economist Pat Bustamante said the rise in borrowing demonstrated there was “no free lunch” when it came to government spending.

“It must be funded somehow and with softer commodity prices, slowing migration and the implementation of stage three income tax cuts, revenues didn’t cut the mustard in the September quarter, leaving the credit card to do the heavy lifting,” he said.

Mr Bustamante estimated the increase across the September quarter equated to around $1700 for each member of the working-age population.

The spending surge was seized upon by the Coalition, which in recent weeks has honed its attacks against Labor for what it views as “excessive public expenditure”, even as it has provided scant details of its own economic plans, nor the costings for its nuclear power push.

“The Treasurer’s addiction to spending is sending the country broke,” opposition Treasury spokesman Angus Taylor said.

“The Albanese Labor government’s big spending is keeping inflation higher for longer, with hardworking Australians paying the price.”

Jarden chief economist Micaela Fuchila expected the recent run of strong public spending to continue in the near term, as state governments’ infrastructure plans and pre-election commitments kept expenditure elevated.

“The states have very expansionary budgets still, and it’s very unlikely that this will change, because those projects take some time to ramp up,” Ms Fuchila said, pointing to the costs associated with the 2032 Brisbane Olympic Games.

“I don’t think anyone will cut spending before the election.”

The rise in public spending in the September quarter will add a hefty 0.7 percentage points to Wednesday’s GDP growth figures, the ABS estimated, surpassing the 0.5 per cent contribution private sector economists had anticipated.

The quarterly jump in public spending was made even more significant due to upward revisions to previous quarterly figures totalling $34bn over the 2023-24 financial year.

Last month, the RBA admitted it had undercooked its public spending forecasts due to unforeseen cost-of-living giveaways and the growing ­expense of existing government services.

The ABS figures also showed taxation revenue dropped 17.3 per cent to $187.7bn over the quarter, owing to lower company tax receipts amid a decline in commodity exports, while Labor’s overhauled stage three tax cuts also clipped the income tax take.

The net operating balance – measuring the difference between the governments’ operating revenue and expenses for the financial year – slumped $32.7bn to a deficit of $18.3bn.

Separate figures, also released on Tuesday, showed Australia’s current account deficit narrowed to $14.1bn in the three months to September, after the nation’s trade surplus shrank to its smallest level since 2018, while net exports added less to growth than forecasters had anticipated.

The reading was higher than the $10bn shortfall analysts had expected, owing to a decline in commodity prices and fewer enrolments of international students.