Record government spending means interest rates remain high for longer

National accounts and latest labour force data show record government spending masks deep private sector recession. They also slow that deplorable productivity will ensure interest rates remain high for longer, and the effect on households’ disposable income will be increasingly negative.
Government spending reached a record-high share of GDP by growing a further 1.5% in the second quarter of the current financial year while the market (that is all other industries) already in recession, went further into decline by another 0.6%.
The second quarter national accounts show household spending per capita has dropped for six successive quarters, and to make matters worse, real per capita household disposable income is now tracking 8.2% below its peak at this same time of year just two years ago.
The decline represents one of the highest in the world and would have been even greater were it not for the collapse in the household savings rate to only 0.6 % (which indicates negative disposable savings when compulsory superannuation savings are considered).
Thus, it’s disquieting to note the opinion of Westpac senior economist Pat Bustamante who says the increase in new public spending as a share of the real economy is unprecedented in speed and scale, rivalled only by the mining boom in terms of its significance to the economy.
However, unlike the mining boom, current levels of public spending can only be funded by recurrent government revenue and higher taxes.
Jobs and government spending
The reality of Australia’s labour market is that government spending is the prime creator of jobs.
According to Australian Bureau of Statistics (ABS) 268,000 jobs were created in government-funded roles in 2023-24 compared to only 33,000 new jobs in the market sector.
While total public sector wages surged by about 5% in the second quarter of the current financial year, non-farm private sector wage rose by just under 1%.
However, some dark clouds have silver linings. Macks Advisory is aware average private sector pay rises in private sector agreements have just hit 4% in for the first time in 12 years while the number of workers covered by agreements has risen to 2.21m, the highest since 2020.
All of the above could be verging on palatable if it resulted in increased productivity, but unsurprisingly it hasn’t, because historically government-funded jobs, now dominant in the economy, yield poor productivity growth – and Australia’s labour productivity is already deplorable (see our previous newsletter articles on this topic).
Pat Bustamente (previously mentioned) warns that increased public spending will lead to even slower productivity growth.
He says the increase is being driven by government consumption – essentially the mounting provision of subsidised public goods and services, including childcare, education, health care, aged care and disability support.
Much of this relates to the NIDS which is growing in cost by some 20% annually and is forecast by the Parliamentary Budget Office to hit $100b a year within a decade.
A chart by economist Tarric Brooker that tracks job growth across the first two years that the past seven Prime Ministers of Australia have been in office, shows that Anthony Albanese has created the highest level of non-market-based jobs growth of any PM since records began.
The number of such jobs has leapt 13.8% in the first two years he’s been in office eclipsing a comparable 10.8% under the Rudd government and 9% under Malcolm Turnbull.
Consequences for disinflation
Marcel Thieliant, who heads the Asia Pacific department of Capital Economics, clearly disagrees with Treasurer Jim Chalmer’s assertion that the Reserve Bank of Australia (RBA) is responsible for “crushing” Australia’s economy.
Mr Thieliant in a recent media statement warns that the explosion in government spending is hampering the RBA’s fight against inflation. “With the economy still operating above capacity, that, in turn, will make it even more difficult for the RBA to rein in persistently strong price pressures”, he says.
Mr Bustamente agrees wholeheartedly, informing us that increased government spending in areas already short on resources such as construction and healthcare, is siphoning resources from the private sector.
Consequently, this is driving aggregate public demand, that as a share of GDP, has already hit a record high of 27.3%. Furthermore, Mr Bustamente declares that by increasing expenditure in areas like infrastructure construction, the government is elongating the inflationary process and adding to the RBA’s concerns.
So, what of the future?
A Commonwealth Bank of Australia chart we’ve seen recently shows that growth in healthcare and social assistance jobs in Australia has, since 2021, dwarfed other Anglosphere nations. (The Anglosphere is the American sphere of influence, with a core group of nations that today maintains close political, diplomatic Anglo and military co-operation.)
Most of these new Australian roles have been in caring jobs in the social assistance category, and a roundup of economists’ opinions relative to the current explosion of non-market jobs, indicates that it will have national budgetary and productivity implications.
This is because such jobs are funded largely by way of tax revenue, and the non-market sector inevitably seems to exhibit much lower productivity growth than the market sector.
Therefore, since there’s been such phenomenal growth in public spending and it’s predicted to increase, it seems Australia’s productivity growth is likely to be hobbled for a disturbing length of time.
Accordingly, there is a pressing need for a valid answer to this question: from whence will our nation’s future productivity growth come? Perhaps it’s simply that unproductive government spending needs to be curbed, and many of us need to work both a little harder and a whole lot smarter.