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The Australian Government gets Bigger

(Reprinted from the Financial Review 1 April 2022)

The one big public sector takeaway from the federal budget is that big government is here to stay. And almost certainly to get larger, as health, disability, aged care, early childhood and climate emergency costs surge over the next 40 years.

Taking the helicopter view, federal spending during the 50 years until the pandemic hit had averaged about 24.3 per cent of GDP, trending upwards from 18.3 per cent in 1971.

During the pandemic, spending ballooned to 31.6 per cent of GDP, mainly off the back of JobKeeper, lockdown payments and other business support that was largely successful in maintaining employment structures and business continuity.

This week’s budget commits Canberra to $626 billion of spending, equal to about 27.2 per cent of GDP. The budget predicts spending will slowly reduce to 26.3 per cent of GDP in 2025-26 then trend along that path to 2032-33.

Beyond that, Treasury’s 2021 Intergenerational Report predicts the public sector’s role in the economy will again grow, with spending predicted to reach 27.7 per cent of GDP by 2060-61.

The Intergenerational Report is predicting health costs as a proportion of the economy to rise by about a third, and aged care costs to double over the next 40 years.

That means government will have increased its share of the economy by 10 per cent over the 90-year period since the election of Gough Whitlam’s government.

In today’s dollars, that makes the public sector about $230 billion larger in an annual economy of about $2300 billion.

If history is a guide, these spending predictions are likely to be on the low side. The Aged Care Royal Commission fingered chronic underfunding, as did the Mental Health Commission.

Disability assistance is also predicted to jump from $55 billion spent in 2020-21 to $81 billion over a six-year period.

Chronic underinvestment in social housing means there is a large catch-up to be done. Housing is a key driver of economic and societal wellbeing, meaning governments inevitably pick up the tab of housing disadvantage through the downstream welfare, health and public safety systems.

More broadly, data work done in NSW shows just how critical the first 2000 days of a child’s life are to ensure they do not become yet another intergenerational casualty, leaving various tiers of government to pick up the pieces for decades. The modelling suggests the burden will fall roughly 55/45 between the Commonwealth and the states/territories.

With governments expected to increasingly embrace investment approaches to social supports, this suggests rising demand for more funding for the early childhood, pre-school period. This is already evident as political parties respond to the need for more affordable childcare.

Amid rising international strategic competition, defence spending is also on the march, predicted to rise by 30 per cent over the fiscal period 2021 to 2026.

The emergency bill for this year’s east coast floods is likely to be the highest on record, with Canberra expecting to spend more than $6 billion on disaster relief and recovery. That was before this week’s second flood event in NSW, and climate models predicting more catastrophic weather events in future. As temperatures rise, demands to fund longer-term recovery and forward resilience measures are not going away.

The COVID-19 emergency pushed government into a significantly larger role. As the dust settles, all the official indicators are the public sector is going to be materially bigger than it was and will continue to get significantly larger over the medium to longer term.