Government cash splash to remain at record-high as cost-of-living crisis rages on

One of the key economic issues during the COVID pandemic and in the years since the lockdowns ended, is the rise in government spending. This is not just in raw dollar terms, but also as a proportion of the overall economy.

According to Australian Bureau of Statistics data, public demand – government spending in other words – has reached a record high above 27 per cent of GDP. This is well above the pre-pandemic average of around 22 to 24 per cent of GDP.

It has occurred for reasons that are linked to the government managing the once in a generation cost of living concerns, which in other words is providing the population with more of what they want – better health and aged care, defence and infrastructure.

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During the COVID pandemic, government spending rose from around 23 per cent of GDP to 27 per cent of GDP.

This was the result of the Morrison government and Treasurer Josh Frydenberg unfurling massive government spending on health-related issues and measures to protect businesses and jobs during the economic dislocation that was unleashed during the one in-100-year pandemic.

As the pandemic measures ended and were wound back, government spending edged lower.

This was aided by a significant tightening in budget policy from the Albanese government and Treasurer Jim Chalmers who delivered the first back-to-back surpluses in 2022-23 and 2023-24.

The pullback in government spending was moderate but was not sustained.

Fast forward to a range of government policies that the Albanese government promised to deliver at the 2022 Federal election including defence, aged care reform, health funding, childcare, wage increases, housing, infrastructure development including renewable energy, revamping the public service, among others, and the rate of government spending moved higher through 2024 to the record level being witnessed today.

It is safe to say that the government is delivering on its promises and giving the population the services that they find essential and necessary in the current social, economic and geopolitical climate.

Indeed, the popularity of the bulk of those areas where government spending has been delivered is difficult to question.

Better health care, nursing for old people on care facilities, more social housing, access to childcare – all social and well as economic reforms that people want. So too with cost of living measures.

Cutting these programs so that government spending returns to a particular level of GDP would be unpopular and indeed, break a commitment from the current government to provide those services. It also has no economic reason.

The budget big picture

As mentioned, the government was able ramp up spending yet still delivered budget surpluses.

This was done via a lift in revenue – unexpectedly high commodity prices, stronger than expected employment and wages growth and savings in interest costs from lower government debt all help to deliver the revenue needed for budget surpluses.

While there are areas of government spending that are and should be looked at for efficiency and bottom-line savings, such as the National Disability Insurance Scheme, areas of defence and contracting out of government services to name a few, the size of government spending will likely remain around the recent record highs.

Importantly, this bigger government will remain in place regardless of which side of politics wins the next election which will be held on or before May 2025.

The Coalition has some yet to be costed plans to build nuclear power reactors and dams and has committed to extra spending in defence and related areas, all of which are likely to be expensive, big ticket items.

Even if it able to trim spending in some other areas, which is by no means certain, the size of government spending will remain substantially above pre-pandemic levels.

Is bigger government good or bad?

There is nothing inherently wrong or concerning with government spending rising as a proportion of the economy.

This is as long as the costs are broadly covered by tax and other government revenue, if the spending is delivered efficiently and fairly and, critically, if it is in areas that people want that improve their well-being and productivity in the economy more generally.

It seems very unlikely, indeed impossible, for the level of government spending as a share of GDP to return to the pre-pandemic levels.

The electorate does not want cuts to the many services they currently enjoy and political parties do not want to alienate themselves from those voters. Nor are they needed.