Australia government spending growth keeps inflation debate in focus

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Highlights

Australian federal expenses are projected to jump 30% from 2021-22 to 2025-26, with real spending growth of 5.5% in 2024-25 and 4.3% in 2025-26.
Defence, the National Disability Insurance Scheme, and health are identified as main budget drivers, while rapid curbs to spending risk hitting major services.
Opposition proposes a four-year A$31 billion savings plan amid criticism of government spending, but economists warn savings measures may not ease inflation pressures.

Spending growth drivers and budget constraints

As reported by The Guardian, official data showed inflation rose 4.3% in the year to September, up from 4% a month earlier, with fuel prices pushing the headline figure higher. Underlying inflation also edged up to 3.7% on the quarterly measure, keeping pressure on policymakers as debate intensifies over whether government spending is adding to the cost-of-living strain.

The article says total federal expenses are projected to jump 30% between 2021-22 and 2025-26, based on parliamentary budget office data, even after excluding extraordinary Covid-19-era payments. In real terms, federal spending increased by 5.5% in 2024-25 and by 4.3% in 2025-26.

Stephen Bartos, a professor at the University of Canberra and former deputy secretary at the finance department, identifies defence, the National Disability Insurance Scheme and health as the three main drivers of higher public outlays. He says cutting NDIS growth to 6% a year would be a herculean task, highlighting the limited room the government has to curb spending quickly without hitting major services.

Chris Richardson, an independent economist, says inflation cannot be contained through supply improvements alone and that some spending somewhere has to be restrained. Treasurer Jim Chalmers, meanwhile, is portrayed as having few immediate levers beyond defending essential services and pointing to a budget position that is stronger than earlier expected.

Political pressure and wider economic implications

Opposition criticism has sharpened as households and businesses face elevated prices and borrowing costs, with Angus Taylor accusing Labor of out-of-control spending. He has also unveiled a four-year A$31 billion savings package, although the text notes one related tax-back guarantee was initially presented as costing A$22.5 billion over its first four years.

Bartos says it is incredibly unlikely that making legal cigarettes cheaper would draw smokers back from the black market, casting doubt on part of the opposition's fiscal approach. The article argues that such measures could point to larger deficits rather than tighter finances, potentially adding rather than reducing inflation pressure.

Economists cited in the piece also dispute a simple link between the size of government and weak economic performance. Bartos says there is no correlation between the level of government spending and economic performance, while Smith says there is little direct evidence of crowding-out effects.

At the same time, both Smith and Bartos say there is scope to improve budget efficiency. The article adds that weak productivity remains another major reason Australia appears stuck in a high-inflation environment, leaving the spending debate intertwined with broader structural pressures on the economy.

Our earlier article on Mario Draghi’s warning about the inflation–debt trade-off outlined how efforts to control prices and stabilize public debt can backfire if they choke off the investment needed for long-term growth. It highlighted the risk of “fiscal dominance” when interest rates stay above growth for too long, and argued that central banks should aim for the lowest rate path consistent with price stability while governments pursue structural, productivity-boosting investment.

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