National Accounts: Government spending continues to prop up Australia’s economy
The Australian economy remains reliant on public sector spending, with weak productivity and private investment contributing to a two-speed economic recovery.
National accounts data released by the Australian Bureau of Statistics (ABS) on Wednesday show the Australian economy grew by 0.3% in the September quarter of 2024, and 0.8% over the past 12 months. This result was materially short of market expectations with the annual rate of growth now at its lowest point since the pandemic impacted December quarter of 2020.
The overall picture remains largely unchanged. The Australian economy continues to be underpinned by public sector expenditure, with government consumption and public investment both contributing to growth in the September quarter. The strong rise in government spending offset declines in non-residential building and private sector inventory investment. This dynamic provides further evidence of the two-speed economy emerging in Australia, where the public sector is expanding rapidly while the private sector struggles to achieve comparable gains.
With households under pressure in a higher cost of living environment, federal and state governments have stepped in with a suite of household support measures to help Australians and to shore up voter support. Recurrent government spending, which includes cost of living subsidies on programs like Medicare and the NDIS, rose 1.4% in the quarter and 4.7% over the year to September, well above the 3.4% average in the decade before the pandemic. The scale has been significant – federal government spending as a share of nominal GDP is 3.0% higher than a decade ago while state government spending is 2.5% higher.
Chart 1: Real GDP analytical expenditure aggregates, (index 2010 = 100)
Source: ABS National Accounts
Conversely, private investment increased by a modest 0.1% in the quarter and 1.3% over the year. This increase was driven by dwelling construction which was up 1.2% in the quarter through improvement in work done on new home commencements. Non-residential construction activity, on the other hand, dropped by 2.7% in the quarter.
The data suggests that households may be saving more of the additional money flowing from tax cuts and government rebates than previously expected. In September 2024, the household saving to income ratio jumped to 3.2% from 2.4% while household consumption was unchanged from the previous quarter. Spending on essentials fell by 0.1% in the quarter as the implementation of the energy bill relief rebates reduced the cost of electricity and gas. These rebates are treated as a shift from household to government expenditure in the national accounts.
The rebate-driven fall in household electricity spending was offset by growth in other categories. Clothing and footwear rose by 2.2% in the quarter in response to unseasonably warm weather. Spending by Australian travellers overseas also contributed to growth in tourism categories including hotels, cafes and restaurants, and recreation and culture. Overall, discretionary spending rose 0.1% in the quarter but remains down 1.1% in the year to September 2024.
Notably, per capita GDP declined by 0.3% in the September 2024 quarter, marking the seventh consecutive contraction in per capita growth. Weak productivity in the quarter, coupled with a declining terms of trade, has further eroded living standards. As highlighted by Deloitte Access Economics in the December 2023 Business Outlook publication, “by the end of 2024, the primary economic challenge for the country will not be lowering the rate of inflation, it will be lifting the rate of growth”. As the year draws to a close, those sentiments ring true.
The economy continues to lean heavily on public sector spending and population growth while grappling with stagnant productivity. Without a shift in this growth mix, achieving stronger and more sustainable economic growth will remain elusive.
This newsletter was distributed on 5th December 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Naasha Kermani, Senior Economist at Deloitte Access Economics
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