Spending growth threatens economic future

The rising trend of government expenditure in Australia has long been present but has received new impetus from government policy in recent years.

Economists have paid it more attention because of inflation. But even as inflation recedes, the growth of government spending remains a serious economic concern because of what it means for persistent budget deficits, rising public debt and taxation, weak productivity growth and the societal consequences of a deepening dependency on government.

A culture of dependency and entitlement has taken root in the population and political behaviour has become only too willing to accommodate and encourage it in a feedback loop.

This has been on display in recent policy announcements and in the 2025 federal election campaign. The community’s expectations of government have outgrown its economic capacity to respond responsibly, and only government itself can reset those expectations.

Total government expenditure now stands near 39% of GDP, up from 34–35% before the global financial crisis of 2008. At the Commonwealth government level — which is the focus of this report — the increase over that period has been from 24–25% to above 27% currently.

Narrowing the focus to the period since 2012-13, we find that Commonwealth real per capita expenditure has registered an average annual increase of 1.8%, compared with productivity growth of 0.5% and real GDP growth of 0.8%. This gap cannot be allowed to persist, and its closure is most unlikely to be achieved by resurgent productivity — it will require action by government to moderate spending growth.

Delving into expenditure program details, we find that a list of a dozen social spending, ‘care’ economy and defence programs, along with public debt interest, has averaged growth of almost 10% a year since 2012-13 and lifted its share of the budget from around 35% to almost 50% in just 12 years. The NDIS, of course, dominates this growth story.

Covid-19 pandemic era spending was also a factor, but its main legacy has been the debt service bill from the massive deficits of that period.

Administrative expenses such as the public service payroll were restrained before the pandemic but have risen sharply since. Controlling these expenses is essential, but will not be enough on its own to make room for program expenses to continue their rapid ascent.

Cutting the running costs of government is a worthy goal, but government also needs to do much less and to do those things much more effectively.

Looking ahead, the forward estimates point to easing growth in most of the fastgrowing program expenses except debt interest, while other expenses are said to be slowing to a crawl. However, this outlook strains credulity in view of the long list of known pressure points in the budget.

Policy action to bring down the growth of government spending is critical to the country’s economic future — but it is far from clear that such action will be forthcoming. There is much talk of the need for tax reform, but the need for expenditure reform is just as pressing.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former World Bank, IMF and federal and state Treasury economist.