Massive government spending has been blamed for the recent GDP figure, which showed Australia’s inflation problem is not going anywhere.
Australia’s economy grew 2.6 per cent in the year to December and lifted 0.8 per cent in the final three months of 2025.
Productivity was flat in the quarter and lifted one per cent throughout the year, sparking concerns the economy is running beyond its capacity.
This comes as public sector spending sits at around 29 per cent of the nation’s economy and is well above historical averages.
KPMG’s chief economist Brendan Rynne noted that growth was excessively boosted by public sector spending, as public investment growth outweighed private business investment.
“The December National Accounts do not show an economy that is turning a corner from a standard of living perspective,” Mr Rynne said.
“Rather, they reaffirm a position of a weak private sector, a concerned household sector, and a government sector that is crowding out business.”
He noted that growth was supported by a build-up of inventories – 40 per cent of which are public sector related – which contributed 0.4 per cent to GDP growth.
Public sector spending as a share of GDP rose from 28.5 per cent in the September quarter to 28.6 per cent in December.
Mr Rynne stressed that the upcoming federal budget in May will be crucial for Labor to adopt reforms that “allows the economy to reset a course that produces improved outcomes for all Australians”.
Capital Economics’ head of APAC Marcel Thieliant said the public sector was heaping pressure on the economy and could force the Reserve Bank of Australia to hike interest rates.
“The inexorable surge in public spending in recent years is a key reason why capacity constraints never disappeared despite aggressive monetary tightening,” Mr Thieliant said.
“And with scant evidence that Labor has learned its lesson, the RBA has more work to do.”
His warning comes as unemployment hovers near historical lows at 4.1 per cent and inflation remains well outside the RBA’s 2-3 per cent target band at 3.8 per cent.
The RBA was forced to hike the cash rate last month, despite cutting three times last year.
Money markets are now pricing in a 34 per cent chance of a rate hike next month, up from 32 per cent before the data was released.
Wednesday’s GDP figures beat market expectations of 2.2 per cent annual growth and 0.6 per cent growth in the quarter.
Public and private demand each contributed 0.3 per cent to the GDP growth while GDP per capita increased for the fourth consecutive quarter, sitting 0.9 per cent higher than a year ago.
This represents the highest through-the-year growth since the 2022 December quarter, ABS head of national accounts Grace Kim said.
Westpac’s Pat Bustamante said domestic demand momentum was exceeding the nation’s potential growth rate, putting pressure on the government to reel back spending.
“What had been framed as a handover from public to private sources of growth now looks more like a temporary breather in public demand, with both public and private spending again contributing to growth,” Mr Bustamante said.
Inflation could be also under pressure from the conflict in the Middle East as oil prices soar.
Reserve Bank of Australia governor Michele Bullock on Tuesday said that global supply chain issues stemming from Iran closing the Strait of Hormuz may eat into their budgets.
“It’s too early to say what the impact will be, events are moving rapidly and there are different ways this can play out,” Ms Bullock said at The Australian Financial Review Business Summit.
“The staff will take some time to make sense of what it could mean for inflation here. A supply shock could, for example, add to inflation pressures. And the potential implications for inflation expectations are something we are very alert to.”