Paris-based OECD warns on fiscal discipline as government spending in Australia grows
Australian taxpayers face a $42bn borrowing surge as the OECD warns rising government spending threatens to trigger inflation and higher interest rates.
The OECD has warned Australia that fiscal consolidation is needed to stabilise debt levels, as new data reveals taxpayer-funded spending and investment are rising, thwarting Jim Chalmers’ promise to pull back government’s role in driving economic growth.
While businesses and consumers spent and invested at what is expected to be the strongest quarterly growth rate since March 2012, outside of the pandemic, when national accounts are released on Wednesday, official figures show federal, state and local government spending continues to grow, risking inflationary pressures and interest rate hikes.
As government spending rose 0.8 per cent in the September quarter along with government investment shooting up 2.4 per cent, the Organisation for Economic Co-operation and Development warned of the need for “fiscal discipline and consolidation” and the risks of smaller tax revenues, while lifting its forecasts for inflation and growth in Australia.
“The medium-term fiscal consolidation planned at both federal and state levels will be needed to stabilise public debt ratios around their current levels, and will probably have to be sustained into the 2030s given spending pressures associated with population ageing, defence priorities and the net zero transition,” the OECD said specifically of Australia.
OECD secretary-general Mathias Cormann added: “Fiscal discipline is necessary to tackle high and rising public debt, and maintain fiscal space to react to future shocks.
“Fiscal plans should focus on controlling growth in expenditures, improving spending efficiency, targeting social benefits toward those in need, and reallocating spending to areas that better support opportunities and growth,” Mr Cormann said.
Official figures on Tuesday showed that total Australian government borrowing hit $42bn in the September quarter, up from more than $30bn in the corresponding quarter of 2024 – equating to a 40 per cent increase.
Borrowing over the quarter is now at levels last recorded in 2021 during the pandemic and equates to about $1900 for each member of the working-age population.
Mr Cormann warned that higher spending needs across OECD countries were increasing fiscal risks, including pushing net government debt in the OECD from about 75 per cent of GDP today to 230 per cent in 2060. “Ambitious structural reforms are essential to unlock stronger prospects for economic growth,” he said.
For Australia, the OECD expects GDP growth to quicken to 2.3 per cent in 2026, slightly up from the OECD’s previous projection of 2.2 per cent.
Core inflation, which the Reserve Bank uses for interest rate settings, is forecast to hit 2.9 per cent this year up from the OECD’s earlier projection of 2.7 per cent, while next year it is expected to hit 2.6 up from the previous forecast of 2.5 per cent. The current core inflation rate is 3.3 per cent.
“The main fiscal priority is to progressively reduce structural deficits via greater spending control and well-designed revenue increases,” the OECD’s report said of Australia.
The OECD’s echoing of the International Monetary Fund’s warning about fiscal discipline, comes as official figures showed both government spending and investment had continued to grow despite a rebound in the private sector.
Economists said this would add challenges to an already limited economic capacity, which the Reserve Bank has warned is now at its tightest in any recovery over the past 40 years.
Commonwealth Bank senior economist Belinda Allen said public demand – a combination of both investment and consumption – “was slightly stronger than expected”, and if that continued as the private sector recovered there were risks of the economy overheating and interest rates rising.
“The general expectation is that there will be a handover – you don’t see that in the September quarter but maybe in a year’s time,” Ms Allen said.
“If it doesn’t and both continue, that’s when we could see the economy spill over.
“We don’t think there will be a slowdown in public demand. It will reinforce the view that the economy is at its speed limit and that could be inflationary. It means there will be no more interest rate cuts.”
The CBA had anticipated the peak of the public investment pipeline had been surpassed. “However, the data today suggests this may not be the case,” CBA said in a note to clients.
Despite the stronger than expected public component, CBA has maintained its call for GDP to lift by 0.7 per cent in the September quarter when the national accounts are released on Wednesday.
Westpac economists Pat Bustamante and Mantas Vanagas also noted the higher public spending but have left their forecast for September quarter GDP unchanged at 0.8 per cent.
“New public investment played a key role, advancing 2.4 per cent, after falling 7 per cent over the past three quarters. The investment pick up was broadbased across both state/local and federal levels, with new projects coming online,” the Westpac economists said.
“Public consumption also was a key driver of the lift, up 0.8 per cent in the September quarter, a slightly softer pace compared to previous quarters given the unwind of cost-of-living measures.
“Consumption was up at both state/local at 1 per cent and federal 0.5 per cent levels, with the latter seeing similar increases in defence and non-defence spending.”
UBS economist George Tharenou said new public demand would contribute to quarterly GDP growth of “a large 0.3 percentage points” while the annual contribution would moderate further to 0.4 percentage points. Annual growth is now 1.4 per cent – the weakest since 2015.
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