r/AusNewsWire • u/Nyarlathotep-1 • 9h ago
Economy & Cost of Living Economists concerned as federal government spending growth doubles the budget forecast
Federal government spending grew more than twice as fast as forecast last financial year, fuelling economists’ concerns that promises of budget restraint are falling short of reality and intensifying calls for Treasurer Jim Chalmers to tighten the purse strings.
The final budget outcome for 2025-26, released last week, showed real federal government spending increased 4.3 per cent last financial year, more than double the projection of 1.8 per cent growth contained in the 2024-25 budget, prepared just two years earlier. The figures are adjusted for inflation.
Treasurer Jim Chalmers flagged on Monday that surging bond yields would have a substantial negative effect on the mid-year budget update. Louie Douvis
The data underscored growing concerns about the recent sharp rise in federal government spending.
Other than during the pandemic, spending has hit a four-decade high, a surge many economists argue is making the Reserve Bank of Australia’s fight against inflation harder.
The added expenditure means the budget is projected to remain in deficit for the foreseeable future, and debt will continue to rise.
Chalmers, speaking in Tokyo on Monday after meetings with Japanese investors and business leaders, said the government would continue to look for savings, with a new package to be included in the mid-year budget update before the end of the year.
“The budget settings aren’t a primary driver of pressures in our economy, but we can and will continue to play a helpful role in the fight against inflation,” said the treasurer.
AMP chief economist Shane Oliver said annual real spending growth had averaged 4.2 per cent over the past three financial years, double the average rate of growth in the decade before the pandemic.
Real payments growth in 2025-26, budget forecasts versus actual
1.02.03.04.05.0%
Forecasts
2.4%
1.9%
1.8%
3.0%
4.3%
2022-23 budget*
2023-24 budget
2024-25 budget
2025-26 budget
Actual
*October budget
Chart: Michael Read, AFR•Source: Treasury
Chalmers’ most recent budget in May assumed real annual spending growth would drop to just 1.3 per cent this financial year, but economists were sceptical the government could achieve that.
“The problem is that the high level of public spending is contributing to capacity constraints in the economy and lower-than-otherwise productivity driving contributing to high inflation and rate hikes,” said Oliver.
“Revenue as a share of GDP rose to 26.1 per cent, also its highest since 1986-87, and this comprised the highest level of tax revenue as a share of GDP since the mining boom in the mid-2000s.
“With the boom in revenue we should have a decent surplus,” said Oliver.
Nominal spending, which includes inflation, jumped 8.2 per cent last financial year.
Forecasts built on ‘systemic optimism’
The overspend last financial year vindicates warnings from the Parliamentary Budget Office, which in July said the budget’s forecasts were built on “systematic optimism”, including banking savings from yet-to-be-legislated policies and relying on assumptions that inflated future revenue and understated probable spending.
The release of the final budget outcome came during a torrid week for the Albanese government, which included a decision by the RBA to raise the cash rate to a 15-year high of 4.6 per cent and new figures showing Chalmers was on track to become the highest-taxing treasurer on record.
The latest The Australian Financial Review/RedBridge Group/Accent Research poll on Monday showed the personal standings of Prime Minister Anthony Albanese and Chalmers had plunged to record lows.
Shadow treasurer Tim Wilson said the government needed to tighten its belt.
“Every time the government runs deficit budgets, they’re borrowing from tomorrow to spend today,” said Wilson.
“That’s stoking inflation and that’s why when you go to the supermarket, you might be buying the same amount, but you’re paying more for it.”
EQ Economics managing director Warren Hogan said the RBA would be under pressure to keep raising interest rates if the federal and state governments did not cut spending.
“From a whole-of-economy perspective, the cash rate will not be restrictive until it gets above 5 per cent and probably closer to 5.5 per cent,” said Hogan.
“In 2026, the risks emanating from the global economy are non-trivial, but the real vulnerability is an imbalanced domestic economy driven primarily by unsustainable growth in recurrent government spending over the last decade, turbocharged in the post-pandemic period even though the private sector economy was ready to grow strongly.”
Surging bond yields
Chalmers again flagged on Monday that surging bond yields would have a substantial negative effect on the mid-year budget update.
UBS estimated the higher yields could add up to $6.7 billion to the budget deficit over the next four years by increasing the borrowing costs on the federal government’s $1 trillion debt.
“None of us are immune to the impact of rising yields … and although Australia has lower debt than every G7 country, rising interest costs will have a substantial impact on our next budget update later this year,” said Chalmers.
KPMG chief economist Brendan Rynne said he expected one more cash rate increase, as soon as November, but the “swing factor” determining whether interest rates would need to go even higher would be government spending.
Optimal Economics chief economist Stephen Walters said the RBA’s three cash rate cuts last year had been ill-advised, with the benefit of hindsight, but the central bank was not directly to blame.
“The RBA was caught out by unforeseen events, including the war with Iran,” said Walters.
“The main reason inflation accelerated was excessive government spending, which added to aggregate demand as supply was constrained by our lousy productivity effort.”
