SYDNEY: Australian governments are spending at an “unsustainable” pace and public debt is set to rise further, leaving the economy more vulnerable to future shocks, a report by the e61 Institute and McKinnon finds.
As a share of gross domestic product, state and federal government expenditure swelled to 38.2% in 2024 from 34.7% in the early 2000s, according to the authors, led by former Productivity Commission chair Michael Brennan.
They note that debt has risen during a period of strong national income fuelled by high export prices and a tight labour market, leaving Australia exposed to a sharper deterioration in its finances if growth slows and revenues weaken.
“There is no imminent debt crisis, but with renewed pressures ahead like an ageing population and slow productivity growth Australia’s fiscal options are narrowing,” Brennan’s team said in the report released yesterday.
“The nation’s capacity to weather future shocks, and fairly share burdens across generations, is at risk.”
The warning comes as debate intensifies over the role of fiscal policy in rekindling inflation, which forced the Reserve Bank of Australia (RBA) to become the first major monetary authority in the world to raise interest rates this year.
While the RBA cited excess demand running up against supply constraints for its decision, former governor Philip Lowe also this week criticised the government’s spending trajectory and sluggish productivity growth.
“Productivity capacity of the economy is not growing very quickly and the government wants to keep spending and wants to keep offering people handouts, which adds to demand, which in the normal course of events would be fine,” Lowe said in an interview with the Australian Financial Review.
“But if the supply is not growing, you can’t do it and if you try to do it then interest rates have to go up,” he warned.
By international standards, Australia remains in a comparatively strong fiscal position and counts itself among a handful of nations with the coveted AAA credit rating from the three main agencies.
However, its gross debt position has deteriorated to 13th among 38 countries in 2023 highlighted in the report, from third in 2007.
A mid-year fiscal update in December showed Prime Minister Anthony Albanese’s Labour government is facing deep budget deficits across its forecast horizon through fiscal 2029.
Australia’s net debt is projected to rise to 37.9% of gross domestic product (GDP) in 2028 to 2029 from 34.8% in 2025 to 2026.
“On this current path, it is unlikely that government debt will naturally decline,” Brennan’s team said, identifying three structural drivers of rising public liabilities:
If government spending remains at its current share of GDP, the report estimates tax revenue would need to grow faster than incomes over the next decade to stabilise the budget balance.
“Absent reform to the tax system spending restraint will be needed to avoid burdening future generations with a fragile, inequitable and inefficient Australian economy,” the authors said. — Bloomberg
