Federal spending has climbed to its highest share of the economy since the early 1980s, excluding the pandemic years, and the fiscal arithmetic now sits at the centre of Australia’s inflation problem. Total government expenses jumped 30% between 2021-22 and 2025-26, according to the parliamentary budget office. Even after accounting for inflation, federal spending rose 5.5% in 2024-25 and 4.3% in 2025-26. That pace, economists say, is feeding demand into an economy already running hot.
The numbers land at a delicate moment for markets. Inflation jumped to 4.3% in the year to September, up from 4% the month before, driven largely by rapid petrol and diesel price increases. Even stripping out fuel, underlying inflation ticked higher to 3.7% on the quarterly measure. Both readings sit well above the Reserve Bank’s 2.5% target, and a fourth interest rate hike on Tuesday looks like a done deal. The political framing was immediate: opposition leader Angus Taylor opened parliamentary question time by demanding the prime minister admit Labor’s “out-of-control spending” is forcing families and small businesses to pay more for everything.
Whether rising public expenditure deserves primary blame is more contested. Stephen Bartos, a University of Canberra professor and former deputy secretary at the finance department, identifies three structural drivers of growing outlays. The first is defence, as governments worldwide respond to an increasingly fraught geopolitical reality. The second is the national disability insurance scheme, which Bartos says would be a “herculean task” to slow to 6% annual growth, a rate he notes is still twice as fast as the economy is expanding. The third is health spending, which “ratcheted up considerably through Covid but never really came down”, boosted by a more generous pharmaceutical benefits scheme and new hospital funding deals with the states. Spending on the care economy beyond the NDIS is also climbing rapidly, as are interest payments on an expanding national debt.
Stephen Smith, a partner at Deloitte Access Economics, argues the spending trajectory would have occurred regardless of who held office. “To be fair, a lot of it is structural,” he said, noting the Australian economy is harder to manage today and that there are calls on government to play a bigger role in sectors like care. But that offers no blank cheque: the government needs a tight fiscal strategy and difficult decisions.
For investors watching the budget position, Smith’s framing is the crucial one. High spending paired with equally high taxing could be demand-neutral. By that measure, the government looks exposed. Despite Jim Chalmers’ talk of hundreds of billions in savings and better-than-expected bottom lines, the budget papers show a deficit just shy of $10bn in 2024-25, $22.3bn in 2025-26, and an expected $31.5bn shortfall this financial year. Running deficits, Smith explains, adds demand into the economy and makes fiscal policy stimulatory, complicating the Reserve Bank’s task. How much harder is debatable: the 24% rise in fuel prices over the year to September played an outsized role, with transport accounting for a full percentage point of the 4.3% headline increase, according to the Australian Bureau of Statistics.
The analysis underpinning this piece, and the fuller argument about whether the spending surge is truly out of control, is set out in detail at https://www.theguardian.com/business/2026/nov/01/is-the-government-really-on-an-out-of-control-spending-splurge-its-complicated.
The Coalition’s response came on Monday, when Taylor unveiled a four-year, $31bn savings package. It targets what he calls Labor’s climate bureaucracy, ending subsidies for home batteries and electric vehicles, scrapping housing measures, culling public subsidies for industries like critical minerals, and barring non-citizens from the NDIS. The costing also includes a plan to slash tobacco taxes by 80%, which the Coalition claims will raise $7.9bn over four years by luring smokers back to the legal market. Bartos called that “incredibly unlikely”, and he is sceptical the package moves the needle: cutting the Net Zero Authority might save a little, but it is dwarfed by rising NDIS and health spending. The Coalition’s promised “tax-back guarantee”, automatically lifting income tax thresholds with inflation, was initially costed by Taylor at $22.5bn over four years, but a more credible assessment puts it at $35bn, potentially reaching $44bn in a single year within a decade. That implies larger deficits, and more inflation pressure, not less.
Chalmers, for his part, has promised not to touch essential services while insisting the budget is in better shape than expected, with December’s mid-year update looming as a key milestone. Independent economist Chris Richardson says somebody somewhere has to be stopped from spending money, and so far it has been the Reserve Bank, using rate hikes to curb household spending. Raising taxes is politically unpalatable, which leaves cuts, and as Smith concedes, finding $30-odd billion in savings is not easy. Both economists see room in better-targeted subsidies and efficiency, and both reject the claim that high spending itself dulls economic dynamism. “There is no correlation between the level of government spending and performance of the economy,” Bartos says. For Smith, the bigger drag on Australia’s inflation outlook lies in tax and regulatory settings and stagnant productivity, not the size of the public purse.