Is federal government spending really to blame for higher inflation? It’s not clear cut |
There has been a spate of articles and commentary in recent days calling on the Australian government to reduce spending.
Those calling for government cuts – mostly long-time advocates of smaller government – claim this would lower inflation, and as a consequence reduce interest rates.
In fact, claims that government spending is now a very large share of the economy are exaggerated.
So, what’s actually going on with government spending?
Federal government spending has fluctuated between 23% and 27% of the economy (gross domestic product or GDP) since the mid-1970s. The exception was a spike during the COVID pandemic. Its current level is not particularly unusual.
The latest Reserve Bank forecasts estimate that “public demand” (spending by all governments, federal, state and local) expanded by 2.2% during the course of 2025. This was less than the growth in consumer spending (3.1%), home building (5.5%) and business investment (2.5%).
Nor has increased government spending on services led to a wage explosion in the public sector, which was a significant contributor to inflation in the 1970s.
Both public and private sector wages........