Public sector spending threatens to divert funds from government services, warns a report.
Australia “needs to remain vigilant” to ensure debt levels remain low, advises global accounting firm EY in a new report – Structural deficits and debt threaten Australia’s long-term fiscal sustainability. “The consequences of letting debt ratios continue to rise would be less fiscal flexibility and higher interest payments diverting funds from government services,” it says.
Cherelle Murphy – EY chief economist – said “spending by state and territory governments has increased significantly”. The largest component of government spending is employee expenses, which “have surged and consistently come in over budget”. This reflects “both higher numbers of government employees and wage increases”.
From FY15 to FY24 the number of state and territory total public service employees grew by 27 per cent, with the largest increase in the ACT – which grew by 46 per cent – followed by Victoria at 41 per cent.
As a result, public sector spending in Australia “remains elevated compared to long-run averages, while governments fail to make headway on fiscal consolidation”, says the report.
According to The Institute of Public Affairs, the public sector’s share of GDP is around 28 per cent – above the long-run average of 23 per cent. This partly reflects a growing demand for health, aged care, home care, and disability services.
Public spending is expected to continue increasing, says the report, “with FY26 Commonwealth and state budget forecasts showing both large recurrent spending and asset investment programs over the next four years”.
Spending by state and territory governments has increased significantly.
Collectively, states and territories face operating deficits of $15 billion and $11 billion respectively in FY25 and FY26 and are only expected to return to surplus by FY28. “This means that expenses are expected to be greater than revenue for a further three years, extending a run of deficits which began in 2020 as governments responded to the pandemic,” says the report.
Additionally, state and territory government infrastructure investment will hit another record high over the next four years. Indeed, states and territories have a combined asset investment program of nearly $400 billion over the next four years, says the report.
While acknowledging that some of the investment is required to grow the economy and support population growth, Ms Murphy notes “it has occurred through a period of rising construction costs and capacity constraints, leading to cost overruns and delays”.
“It is important for governments to offset this spending elsewhere and ensure these projects are fully funded,” she said.
In conclusion, the report says Australia’s continued delay in resetting finances into a sustainable position “will lead to much more pain in the future when governments will be forced to make hard and difficult decisions, as well as increase the burden on future generations. This includes either diverting spending away from other public services, increasing taxes, or selling assets.”
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