analysis
Australia would be in recession without rising public spending, but we might have lower interest rates
Michele Bullock has been dragged into the debate about the appropriate scale of public spending. (ABC News: Marco Catalano, Nick Haggarty, James Carmody)
There is a cold, hard truth in the most recent economic growth numbers — governments are keeping Australia out of recession.
The evidence is neatly summed up in this graph from Westpac's economics team.
Rising public demand has keep GDP growing in Australia for the past two quarters as the private sector shrinks. (Supplied: Westpac)
Take out the purple columns of public demand over the past two quarters and the economy would have shrunk.
Two consecutive quarters of GDP contraction equals recession, at least on the most popular definition — if not the most useful.
Without using the "R-word", Reserve Bank governor Michele Bullock has acknowledged this fact a couple of times over recent weeks.
When asked by WA Liberal senator Dean Smith last month about expressing "a note of caution to policymakers in regards to their spending appetites", Ms Bullock responded that she didn't believe she had been cautioning anyone, before adding:
"What I've been observing is that the private sector in Australia at the moment is very weak, and the public sector demand has been filling that gap."
Last week — at a dinner attended by top business, economic and policy leaders — Ms Bullock again defended current levels of government spending in the context of rising public sector employment.
"If it wasn't there, if it wasn't filling that gap, then things might well be much worse in terms of the employment market," she argued.
"It's teachers. It's nurses. It's aged care workers. These are all people that we need.
"I don't buy into the idea that growth in non-market sector employment is not a good thing. It is a good thing. We need these people."
Interest rate cuts would have come with a recession attached
But, here's the rub.
The Reserve Bank isn't cutting interest rates yet because it thinks the jobs market is still too strong — unemployment remains at an historically very low 4.1 per cent — and total demand in the economy is still too high compared to its supply capacity. It thinks that's keeping inflation from falling faster.
Both the jobs market and total demand are being propped up by record government spending, now sitting at 27.5 per cent of total economic output.
So, on the one hand, it's hard to argue against that the proposition that interest rates would probably be falling by now if governments had been spending a lot less and employing fewer people.
But, on the other hand, it's practically indisputable that Australia would be in a technical recession and that unemployment would be substantially higher if governments had tightened their belts this year.
That's because, as CBA's head of Australian economics Gareth Aird argues, the RBA's interest rate increases have been extremely effective even though they were smaller than in many other comparable economies.
"Restrictive monetary policy has clearly worked to slow private demand growth in the economy," he noted.
"And, despite a boost in household income via the Stage 3 tax cuts, there was no commensurate lift in consumer spending in the September quarter."
Clearly implied by the RBA's repeatedly stated aim of trying to hold on to as much of the pandemic employment gains as possible, the central bank believes a slow and steady approach that results in keeping interest rates at current levels for longer is a price worth paying for having so far avoided recession and a related jump in unemployment.
And, if the surge in migration across the Tasman Sea is any indication, a lot of New Zealanders are voting with their feet for the RBA's strategy, rather than the scorched earth approach to tackling inflation taken by the Reserve Bank of New Zealand.
Our cousins across the ditch experienced two technical recessions in just over a year, from late 2022 through 2023, after the RBNZ started lifting rates seven months before the RBA and took them more than a percentage point higher — a peak of 5.5 per cent versus 4.35 per cent here.
Unemployment has jumped from a pandemic low of 3.2 per cent to 4.8 per cent, it's still rising, and it would be higher still if so many Kiwis weren't jumping ship for Australia.
Big government election debate
The political reactions to the GDP data also encapsulate the economic debate that will take centre stage at next year's federal election.
In the blue corner, shadow treasurer Angus Taylor seized upon the combination of high public spending and a weak private sector to argue for the Coalition's small government approach.
Angus Taylor says the Coalition wants to reduce government spending and red tape to revitalise the private sector. (ABC News: Marcus Stimson)
"The only plan Labor has is for a big Australia, a big government with big spending. The treasurer's addiction to spending is sending Australia broke," he argued.
"The Coalition will get Australia back on track by boosting investment, increasing competition, cutting government waste and red tape, rebuilding business, lowering taxes and delivering secure, low emissions energy."
In the red corner, Treasurer Jim Chalmers pointed to the repair work he said the Albanese government had successfully undertaken to lower inflation and boost wages from the levels inherited from the last Coalition government.
Treasurer Jim Chalmers says the Coalition would have driven Australia into recession if it had remained in government. (ABC News: Ian Cutmore)
"The rise in employee compensation has seen the labour share of income rise to 53.5 per cent, that's up from 49.3 per cent at the time of the election," he told reporters.
"If our political opponents were in charge the economy would be weaker and household budgets would be under more pressure," Chalmers went on to argue.
"They don't support cost-of-living help. They think there should be $315 billion pulled out of the economy at the worst possible time. That is a recipe for recession and it's a recipe for more pressure for households."
What would you cut in a 'sad economy without much hope'?
The treasurer also laid out a challenge for the Coalition in its push for small government.
The biggest increase in public investment over the September quarter? A 35 per cent surge in defence purchases.
"If our political opponents are planning big cuts to defence spending, they should say so," he said.
Other than that, the ABS data highlights a jump in state spending as a key driver of public demand.
EY's Oceania chief economist Cherelle Murphy pointed out that much of that investment was locked in years ago.
EY Oceania chief economist Cherelle Murphy says Australia's economy is in a "sad" state. (ABC News: Daniel Irvine)
"It's hard to find a government in Australia that doesn't have a record high capital program over the next four years," she observed.
"This is largely thanks to a legacy of infrastructure investment to support the economy through the pandemic.
"Spending pressures on governments also continue, with an ageing population; strong demand for services; rising defence needs in a geopolitically uncertain world; and the energy transition."
It's also thanks to decades of underinvestment in the public infrastructure needed to keep up with an unplanned rapid growth in the population, which continues to stretch transport, health, education and other public services.
But, assuming defence spending is sacrosanct for both major parties, what is the public appetite for less spending on transport infrastructure, hospitals and health care, disability support, aged care, roads, clean energy, childcare, schools or higher education?
Labor is clearly betting not much.
And it wants to make the key pre-election question for an opposition promising smaller government and lower taxes, 'What will be cut to make the books balance up?' and what will that do to an economy still leaning so heavily on the public sector for economic activity and jobs.
On the other hand, Labor will continue to be asked the question of what plans it has to revitalise a sluggish private sector so that the public sector doesn't have to keep picking up the slack.
"The September National Accounts paint a picture of a sad economy without much hope," opined Cherelle Murphy.
"The private sector needs more from their governments than short-term fixes to today's problems."
Whether the next election will deliver that from any party remains the biggest question.