Policy Paper 58 | September 2024 - GOVERNMENT SPENDING AND INFLATION

demand relative to the economy’s potential output.1 The RBA has drawn attention to Some observers welcome this growth the relatively rapid growth of public final to the extent it is a reflection of new demand as a contributor to excessive spending programs and expansion of aggregate demand — although the existing programs perceived to meet Governor has also stated that public sector legitimate nee. [...] However, even before The chart reveals that in the 25 years the pandemic, growth was well above the to 2014/15, public final demand grew at historical average — and since the pandemic an average annual rate of 5.6 per cent, there has been no reversal of the very high which provides a point of reference for the spending levels of the pandemic years. [...] It is not only the year-to-year growth in the nine years to 2023/24 — a cumulative public demand that matters, but also the increase of 56 per cent — means the effect on the level of spending after a long level of public demand is high by past period of strong growth. [...] 8 Implications of the budget surpluses The federal government asserts that revenue to GDP and other measures of the federal budget swing into surplus in aggregate private income have increased 2022/23 and 2023/24 is evidence of the — a trend that is most apparent in the ratio anti-inflationary stance of fiscal policy. [...] However, budgets for to be concerned about the structural 2024/25 are largely set, and it is too late realignment of the economy from the for policy changes to have much short-term private sector to the public sector — impact on the growth of public spending.