Treasurer Jim Chalmers faced criticism regarding government spending and its impact on inflation during a recent interview on ABC’s Insiders. The discussion came shortly after the Reserve Bank of Australia raised interest rates for the first time since 2023, prompting renewed scrutiny of economic policies. Chalmers was questioned about whether public spending was contributing to rising inflation, a topic that has been at the forefront of economic debates.
During the interview, host David Speers asked Chalmers which sector—public or private—had experienced faster growth in the September quarter. Chalmers asserted that the private sector had grown more quickly. However, this assertion was misleading. Data from the Australian Bureau of Statistics indicated that total public demand, encompassing both state and federal expenditure, increased by 1.2 percent in the quarter. In contrast, private demand grew by 1.1 percent, making Speers’ premise accurate.
Chalmers attempted to clarify his position by shifting the focus to contributions to overall GDP growth. He explained that the size of each sector affects how much it contributes to GDP. The private sector, being approximately 2.5 times larger than the public sector, can contribute more to GDP even with slower growth. In the September quarter, the private sector accounted for 0.8 percentage points of GDP growth, while the public sector contributed 0.3 percentage points. While this distinction is valid, it did not address the specific question posed by Speers.
The situation was further complicated by comments from Michele Bullock, the Reserve Bank governor, who stated that both private and public spending were contributing to excess demand in the economy. The shadow treasurer, Ted O’Brien, quickly seized upon the discrepancies in Chalmers’ statements, accusing him of a “disturbing lack of understanding of basic statistics in the national accounts.”
Following the interview, a spokesperson for Chalmers clarified that he was referring to new public and private final demand—an alternative measure that excludes asset transfers between sectors. Under this definition, Chalmers’ claim held true, with new public demand rising by 1.2 percent compared to private demand’s 1.1 percent.
Political Implications of Economic Data
The exchange highlighted not only the complexities of economic statistics but also the broader political ramifications. Chalmers, who has held his position for nearly four years, is aware of the importance of distinguishing between growth rates and contributions. The challenge lies not in his statistical understanding but in articulating a coherent narrative about the government’s role in managing inflation amid significant economic pressures.
Inflation is a multifaceted issue, and it cannot be attributed to a single cause. The Reserve Bank of Australia’s previous interest rate cuts, aimed at providing relief to borrowers before elections, may have contributed to the current situation. These cuts spurred a recovery in private demand, with annual growth hitting a three-year high of 3.1 percent in September. However, stagnant productivity growth—an issue that transcends political parties—has limited Australia’s economic growth potential to around 2 percent without triggering renewed inflationary pressures.
The services sector is particularly affected by these productivity challenges. Wages represent a significant cost for service providers, and without productivity gains, businesses are compelled to pass increased labor costs onto consumers. In September, non-farm unit labor costs rose by 5.4 percent annually, marking one of the highest growth rates among advanced economies.
Housing supply issues further exacerbate the inflation situation, with rents increasing by approximately 4 percent per year. The Albanese government’s flagship anti-inflation initiative—temporary electricity bill rebates—has also faced criticism for inadvertently contributing to inflation as it phases out, demonstrating that relief measures may have limited effectiveness.
Over the duration of the Albanese government, fiscal policies have remained moderately expansionary. Recent budget updates have collectively resulted in a $111.3 billion deterioration in the budget bottom line over seven years. While public demand growth has slowed to 1.4 percent annually as of September, the cumulative effects of years of expansion have pushed public demand to account for 28.7 percent of GDP, the highest level outside of the pandemic.
Despite the argument that public spending did not initiate the inflation surge, the data complicate any claims that it has not played a role in exacerbating the issue. As the government navigates these challenges, clearer communication and transparency regarding economic policies will be essential in addressing public concerns and shaping future fiscal strategies.
