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Highlights
- Australian government spending is at record-high levels, impacting economic targets.
- State debts continue to rise, while federal debt remains lower for now.
- Public sector wages and infrastructure projects are key contributors to the spending surge.
Australia is experiencing a significant surge in government spending, with federal and state-level investments reaching levels not seen in decades. Economists have compared this spending spree to the mining investment boom of the 2000s, noting its potential long-term impact on the economy. Recent data shows that public sector demand from the federal and state governments has risen from around 22.5% of GDP to a record 27.3% in 2023. Projections suggest this could reach 28% by 2025.
One of the key challenges this poses is for the Reserve Bank of Australia (RBA). The RBA has made it clear that the economy needs a slowdown in spending to bring inflation back within the 2% to 3% target. The rising levels of government spending have been cited as one reason why inflation may not return to the desired range until at least 2026. The situation presents long-term concerns for taxpayers as well, with the latest Intergenerational Report predicting budget deficits for the next forty years.
Federal Debt
Despite the unprecedented government spending, federal debt has actually fallen in recent years, thanks to high inflation, rising commodity prices, and consecutive budget surpluses. In 2023, Australia's gross debt was around 34% of GDP, amounting to $906.9 billion. The net debt, after accounting for financial assets, stood at $491.5 billion. These figures mark a seven-year low, though the Treasury expects this decline to be short-lived, with deficits likely to return and debt projected to rise again in the coming years.
Comparatively, Australia’s debt remains lower than many other developed nations. By 2022, Australia’s gross debt across all levels of government was 53.1% of GDP, while the average among OECD countries was 78%.
State Spending
While federal debt may be declining temporarily, state-level spending is painting a different picture. State governments have been running large deficits and accumulating significant debt. The Australian Bureau of Statistics (ABS) reported that, in 2022-23, net debt from all levels of government, including states and local governments, reached 30% of GDP. Ratings agency S&P Global projects that state debt could surpass $800 billion by 2028, a significant rise from 2019.
Victoria has seen the most dramatic increase in debt since 2019, with its borrowing set to surpass New South Wales (NSW) despite having a smaller population. This surge in state debt has put Victoria on track to be one of the most indebted regions by 2028.
Drivers of Increased Spending
Much of the rise in government spending can be attributed to public sector wages, which accounted for $250 billion, or 25% of all government spending in 2023-24. This includes salaries for essential workers such as nurses and teachers. Additionally, social programs like the National Disability Insurance Scheme, aged care, and childcare payments have seen a rapid rise, with spending increasing by 16% in the last financial year.
The rising costs of state infrastructure projects are also contributing to the growing debt. S&P Global has noted that while state debt levels are sustainable for now, increasing interest payments may force governments to rethink their spending priorities, potentially delaying some infrastructure projects or scaling back social services
With spending at such high levels, the future economic landscape in Australia is bound to face multiple challenges, from inflationary pressures to rising debt obligations across state and federal levels.
