Australia's public economy is undergoing a seismic shift, rivaling the colossal mining boom of the 2000s! The government actually gave us a heads-up about these massive structural changes impacting our economy, even dedicating a significant portion of its first major budget three years ago to discuss them. They highlighted three key areas: the burgeoning care and support economy, our ever-increasing reliance on data and digital technology, and the urgent need to address climate change and the net-zero transformation. This wasn't just talk; it was a clear signal that their policies would be shaped by these long-term forces.
Fast forward to today, and we're seeing these predictions materialize. The care economy, encompassing everything from childcare to aged and disability care, is expanding rapidly to meet our population's needs. This has profound implications for how we measure productivity and manage our public finances. Simultaneously, the global race for AI dominance has intensified, leading to a surge in energy and water-intensive data centers. This has ignited valid concerns about the expansion of surveillance states and the rise of what some call 'techno-feudalism' in Silicon Valley.
And, of course, the challenges posed by climate change and the transition to net-zero are undeniable.
But here's where it gets controversial...
While there's been a recent flurry of debate about inflation and government spending, some seem to have forgotten the government's earlier warnings. Westpac senior economist Pat Bustamante has helpfully reminded us that these deep-seated structural shifts have a powerful, lasting impact, far greater than any short-term inflationary blip. He points out that public spending now accounts for a record 35% of domestic output, a significant jump from a decade ago, and is linked to nearly 40% of all employment. This isn't necessarily a bad thing, but it certainly has major economic consequences.
As big as the mining boom?
Bustamante explains that the surge in public spending began about a decade ago, accelerated dramatically during the pandemic, and has remained elevated due to expanded government programs. This means a larger portion of our economy's resources is dedicated to public services. The reallocation of labor is "substantially larger" than what was seen during the mining boom, with public spending creating an estimated 2.3 million additional jobs over the past decade. What's fascinating is that around 40% of these jobs are in market sectors, and about 1.3 million are directly linked to the increased public share of economic activity, with the rest driven by population growth. This demonstrates that public spending influences the job market far beyond government-run services, impacting overall capacity, skill demands, and wage trends.
And this is the part most people miss...
This growth in public spending is also contributing to capacity constraints in crucial sectors like construction, healthcare, and education. With less available slack, these sectors struggle to absorb increases in private demand without pushing up prices and wages. This helps explain the persistent inflationary pressures we're seeing in housing, construction, and healthcare.
Looking ahead, while the infrastructure pipeline might be peaking, the long-term capital deepening from past investments should boost productivity. However, the significant expansion in the labor-intensive care economy might temporarily temper productivity growth. Bustamante anticipates that the peak in public spending might be reached within the next year, though this is subject to change.
His analysis provides a crucial perspective: the substantial increase in public spending, which started a decade ago and accelerated, is now potentially peaking. It's deeply intertwined with major structural economic shifts and is contributing to capacity limitations.
Meanwhile, the Reserve Bank of Australia is navigating a tricky path, aiming to keep unemployment low without fueling inflation, a strategy that carries risks and might make the economy more vulnerable to demand shocks.
So, how much can we truly attribute the inflation surge in late 2025 to the Albanese government's spending choices? While their decisions undoubtedly play a role, a comprehensive understanding of today's inflation requires acknowledging these powerful, long-term economic trends that are fundamentally reshaping our economy, alongside the day-to-day political discourse.
What are your thoughts? Do you agree that these structural shifts are the primary drivers of inflation, or do you believe government spending is the main culprit? Let us know in the comments below!
