Is the government really on an ‘out-of-control’ spending splurge? It’s complicated

Defence, the NDIS and health responsible for much of increased government outlays and treasurer Jim Chalmers has few levers to pull

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“Will the prime minister acknowledge reality … and admit Labor’s out-of-control spending is forcing families and small businesses to pay more for everything?”

That was the opposition leader, Angus Taylor, kicking off parliamentary question time on Wednesday.

Official data earlier that day showed inflation jumped to 4.3% in the year to September, from 4% the month before. Rapid petrol and diesel price increases drove that high headline figure.

But, even removing the impact of soaring fuel prices, underlying inflation ticked higher to 3.7% by the quarterly measure.

Both measures are way above the Reserve Bank’s 2.5% target – and a fifth interest rate hike on Tuesday looks like a done deal.

Frustrated Australians are increasingly inclined to believe Taylor’s argument .

So how much has government spending been rising? Should we blame climbing public expenditure for the cost of living crisis? And what should the government do about it?

Even after accounting for inflation, federal spending increased by 5.5% in 2024-25, and by 4.3% in 2025-26.

Stephen Bartos, a University of Canberra professor and a former deputy secretary at the finance department, says there are three key drivers of growing public outlays.

The first is defence, amid pressure on governments around the world to respond to an increasingly fraught geopolitical reality.

The second is the national disability insurance scheme (NDIS). Bartos says it would be a “herculean task” for the government to successfully halve growth in the scheme to 6% a year.

“That is still twice as fast as the economy is growing,” he says.

“It ratcheted up considerably through Covid but never really came down.”

A more generous pharmaceutical benefits scheme and budgeting for new hospital funding deals with the states were part of the continuing rise in health spending.

Meanwhile, spending on the care economy beyond the NDIS was also climbing rapidly, as was paying interest on our expanding national debt.

Public expenditure as a share of the economy is now at its highest since the early 1980s – leaving out the pandemic period.

But Stephen Smith, a partner at Deloitte Access Economics, argues rising spending would have happened regardless of who held government.

“To be fair, a lot of it [the extra spending over recent years] is structural,” Smith said.

“The world is a complicated place and the Australian economy is more difficult to manage today. There are calls on the government to play a bigger role in the economy, like in the care sectors, that weren’t there in the past.

“But that doesn’t offer the government a blank cheque to spend whatever. They need to run a tight fiscal strategy and make difficult decisions.”

Smith says it’s not about the level of spending, but the budget position. If you are high spending and equally high taxing, then the net impact could be neutral.

“The easiest way to think about it is if you are running a budget deficit, then you are adding demand into the economy and your fiscal policy is stimulatory. If you are running a surplus, you are taking demand out,” he says.

By that rule of thumb, the government looks culpable.

For all Jim Chalmers’ bluster about hundreds of billions of dollars in savings and better-than-expected bottom lines, the budget papers show a deficit just shy of $10bn in 2024-25, $22.3bn in 2025-26, and an expected shortfall of $31.5bn this financial year.

This supports the argument that budget settings are contributing to the inflation challenge, and so making the Reserve Bank’s job harder.

But how much harder is a more difficult question to answer.

Clearly, the 24% rise in fuel prices over the year to September has played an outsized role in the recent sharp rise in inflation.

The transport segment of the consumer price index accounted for 1 percentage point of the 4.3% overall increase in average prices, according to the Australian Bureau of Statistics.

Would there be loud voices for the government to slash spending if Donald Trump’s war on Iran hadn’t triggered a global oil shock, and headline inflation was only 3.5%?

There are also suggestions that the historically high spending as a share of the economy is making the country less dynamic and more prone to inflation.

“There is no correlation between the level of government spending and performance of the economy.”

“It’s difficult to point to any direct evidence of what economists would call crowding-out effects,” he says.

“Sometimes we can see that government spending on infrastructure projects draws workers away from other types of projects, but it’s difficult to see it as a wholesale issue.”

On the back of constant attacks on the government’s “out-of-control spending”, Taylor on Monday unveiled a four-year, $31bn savings package.

It would involve gutting what Taylor calls “Labor’s climate bureaucracy”, including ending subsidies and support for home batteries and electric vehicles, and scrapping a number of housing measures.

They would cull public subsidies for industries like critical minerals, and stop non-citizens from getting the NDIS.

And, in a topsy-turvy costing, the Coalition says its plan to slash tobacco taxes by 80% will raise $7.9bn over four years by luring smokers back to the legal market.

Bartos said it was “incredibly unlikely” that making legal cigarettes cheaper would lure people back from the black market.

“There are almost certainly dozens of small cuts you could make but they won’t shift the dial on inflation,” he says.

“If you get rid of the Net Zero Authority, conceivably you can save a little bit, but it’s dwarfed by increased spending in NDIS and health.

“It would make some difference, but it wouldn’t make a big enough difference to combat inflation.”

The Coalition has also promised that, if elected, it would automatically lift income tax thresholds every year in line with inflation.

Taylor initially claimed this “tax-back guarantee” would cost $22.5bn over the first four years of operation.

But a more credible assessment puts it substantially higher at $35bn in the first four years, and that the scheme could cost the budget as much as $44bn in a single year in a decade’s time.

This suggests larger, not smaller, deficits – and more, not less, pressure on inflation.

Other than promising he will not touch spending in essential services and talking up how the budget is in better nick than they thought it would be, Chalmers appears at a loss on what to do.

This December’s mid-year budget update looms as a particularly important milestone for a government that is on the nose with voters .

Chris Richardson, an independent economist, says “we know you can’t fix supply fast, and so somebody somewhere has to be ‘stopped’ from spending money”.

So far, it’s been the RBA which has been using its one lever and hiking rates to stop households from spending.

Of course, Labor could raise taxes to help beat inflation, but that is politically unpalatable.

“Inflation is not improving and the Reserve Bank needs some help,” says Smith.

But he admits that the moment he says that, he gets “the more difficult question”.

“What would you cut, then? How do you find 30-odd billion dollars in savings? It’s not easy.”

Both Smith and Bartos agree that there are many opportunities to tighten the budget through more efficient spending.

For example, they are critical of the design of green subsidies like for electric vehicles and household batteries, which are available regardless of your household’s income.

So what would Bartos do, if he were treasurer?

“I would introduce a carbon tax, and have a proper PRRT [petroleum resource rent tax] so gas companies pay their fair share.

“I’d make some changes to eligibility to some government programs to target them more tightly. And continue the government policy on reducing spending on consultants.”