Study Links Inflation, Private Sector Stagnation to Government Spending Surge

New research from the Centre for Independent Studies (CIS) reveals that government spending is fuelling inflation, while private sector growth has stagnated, signalling a potential structural shift in Australia’s economy.
The findings come against the backdrop of Australian Bureau of Statistics data confirming an increase in government spending by 1.4 percent.
In a research paper titled Government Spending and Inflation, CIS senior fellow Robert Carling argues that current high levels of public demand, even if future growth is constrained, will cause ongoing detrimental economic effects.
“The Reserve Bank has highlighted the high level of aggregate demand relative to the economy’s potential output as the fundamental cause of persistent inflation,” Carling said.
He added that data confirms the strength of aggregate demand comes from the public sector, not the private sector.
Carling warned that to control the situation, the government must ease spending in the upcoming budget cycle.
“This will only be realized after 2024/25 if it is not frustrated by new spending plans or blowouts in existing programs,” he stated.
The report also observed that increased spending began before the pandemic, under the Liberal Party.
“Government spending was particularly large during the pandemic, but it had been rising strongly for years before and has continued to do so since,” Carling noted.
The research shows that government spending has risen by 94 percent since 2014-15 in nominal terms and 56 percent when adjusted for inflation, with an annual increase of 5.1 percent.
This is much higher than the 2.9 percent annual growth seen in the 25 years before 2014-15.
The statistics showed an increase in government spending, a move Labor defended, saying it is the key “growth driver.”
However, the opposition has criticised this approach.
“Under those circumstances, if you add to spending … it adds to inflation. That’s the situation that economists are making very, very clear right now,” said Shadow Treasurer Angus Taylor.
He added that the cost-of-living crisis cannot be solved “by throwing money at it.”
Carling points out that public sector spending increased in government consumption (such as wages) and public investment (such as infrastructure) at both federal and state levels.
He said that reducing public sector spending and boosting private sector investment are key to realigning Australia’s economy.
ABS data shows private sector investment in new machinery and equipment fell by 1.6 percent, driven by declines in agriculture and retail.
The report highlights the growing divide between a booming public sector and a struggling private sector, noting that public sector spending now accounts for 40 cents of every dollar spent by the private sector, up from 30 cents.
“While public sector demand has been booming, private sector demand (consumer spending and business investment) has been tepid, growing by only 1.6 percent annually in real terms since 2014/15 compared to 3.7 percent in the prior 25 years,” Carling said.
He concluded that if this imbalance persists, Australia’s economic performance will continue to suffer, leaving a legacy of higher taxes, public debt, and lower productivity, even if inflation returns to target levels.