Australia's economy is being cushioned by a big increase in government spending

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Government spending in Australia has increased significantly in recent years, and looks likely to keep climbing.

A research note from ANZ highlights that public sector spending accounts for more 23% of Australia’s GDP.

The bank’s analysts said that underlying public expenditure grew by 5.4% in 2016, noting that public sector spending is not loudly promoted as governments also want to maintain their credit ratings.

Despite that, the analysts said increased government involvement has provided an important cushion for the Australia economy in the transition away from the mining boom.

In terms of employment numbers, the private sector is around 6.5 times bigger than the public sector, but it’s only grown at around 2.5% over the last two years.

Conversely, public sector employment has shot up over the same period — growing 12.4% between May 2015 and May 2017.

The public sector is also doing its part to prop up Australia’s slow wages growth, rising by 2.4% in the March quarter while private sector wages only grew by 1.8%.

According to ANZ, the public sector will continue to play an important role in the Australian economy over the next few years.

“With monetary policy currently having an anemic impact outside of the housing sector, we see well-placed public sector spending as an important counter to the weaker parts of the private sector,” the analysts said.

The bank expects that conditions will remain supportive for higher government spending, with the public sector to contribute around 0.7% to economic growth over the next two years. Public sector expenditure currently accounts for more than 20% of GDP.

Recent data shows a noticeable lean towards increased public spending over the last two years, after significant cutbacks between 2012-2015:

“The 2012-15 period was dominated by fiscal consolidation, particularly as the then-Abbott Government acted to repair the Commonwealth’s balance sheet which had previously been used to prop up the economy in the wake of the Global Financial Crisis,” the ANZ analysts said.

The cost-cutting measures included a freeze on department head counts and tougher negotiations on public sector wage agreements. That reduced government consumption as a percentage of GDP to a 30-year low of 18% in 2014 during the Abbott government era and the now-infamous Joe Hockey budget.

Since then, there’s been a turnaround in both government consumption and investment. The ANZ analysts noted that federal government non-defence consumption – public servant costs, consultants, and the purchase of goods & services – rose to a record 6.2% of GDP growth in the year ending March 2017.

Government investment has also increased, with a more pronounced change at the state level as big infrastructure projects get underway in the larger states – NSW and Victoria – with a shared contribution from state and federal government.

“We expect that public spending growth will continue to be solid. Government investment is likely to grow more strongly than consumption but is only about one quarter as large and so will make a smaller contribution to GDP,” said ANZ.

While there are fluctuations in public expenditure between states, the bank sees upside for more growth as political parties chase votes over the next year with SA, Victoria, Queensland, Tasmania all scheduled to go to the polls.

Looking ahead, ANZ said that government spending will become “an important source of growth for the Australian economy over the next few years”.

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