Unveiled in a recent report by S&P Global Ratings, Australian state, territory, and federal governments are escalating their spending, surpassing pre-pandemic levels by a staggering $50 billion annually. This surge in expenditure, which equates to approximately two percent of Gross Domestic Product (GDP) higher than before the pandemic, is exerting inflationary pressures on the country's economy.
Government Expenditure Fuels Inflation
Analyst Anthony Walker from S&P underscores that this spending spree, driven by increased revenues from income and mining taxes and stamp duties, is markedly affecting the infrastructure sector. This could potentially jeopardize the Reserve Bank of Australia's (RBA) efforts to manage inflation. The RBA may be compelled to raise interest rates beyond the current 4.35 percent to reach its inflation target of two to three percent, as government spending continues to exceed their forecasts.
The Federal and State Spending
The federal government shoulders about 55 percent of the increased spending since 2019, with state and territory governments accounting for the rest. Despite a recent $25 billion arrangement to reform the National Disability Insurance Scheme (NDIS) in a bid to realize future savings, Walker expressed doubt, hinting it could prompt further hikes in government spending.
Uncertain Future for State and Federal Budgets
Looking to the future, the state and federal budgets' outlook remains uncertain, with states projected to run deficits of approximately 2.1 percent of GDP. The federal government, while highlighting a significant surplus from the previous year as a testament to their sound economic management, could have enjoyed a larger surplus had spending been restrained to pre-pandemic levels.
In conclusion, Australia's increased government expenditure paints a challenging picture for the economy and the RBA's battle to control inflation. These factors, coupled with an uncertain future for state and federal budgets, hint at rocky economic terrain ahead.