Economists express concern about job expansion tied to government spending
More than 80% of jobs filled in the past two years have been in Australia’s public service, health, and education, fuelling concerns among economists that the government’s job creation focus could exacerbate inflation.
The Australian government has added over 26,000 new permanent public service positions since Labor’s election, contributing to a 23% increase in the wages bill since June 2022.
Critics argue that such substantial growth in public sector employment and wages could contribute to inflationary pressures, according to the Sydney Morning Herald. Shadow Finance Minister Jane Hume highlighted that public sector spending at both state and federal levels is a significant driver of inflation, echoing concerns from the International Monetary Fund and the Reserve Bank of Australia.
Economists caution that the surge in public sector employment complicates efforts to control inflation, particularly as the expansion offsets slower private sector job growth, maintaining a tight labour market and driving up wages and prices.
While addressing shortages of nurses and teachers remains a priority, the rapid expansion of jobs tied to government spending is expected to be a contentious issue in the upcoming election, says the Sydney Morning Herald.
The Albanese government has repeatedly pointed to the Coalition's past rhetoric about cutting 36,000 public service jobs, citing Nationals leader David Littleproud’s statement last year that it was the “first thing” they would do.
However, a spokesperson for Hume clarified that no commitment to job cuts has been made, stating the Coalition’s position is to halt growth rather than reduce headcount.
Newly appointed Government Services Minister Katy Gallagher dismissed the feasibility of cutting 36,000 public servants, calling it "ridiculous,” says the Sydney Morning Herald. She argued that such reductions would cripple essential services like Medicare and Centrelink.
Hume countered by noting that the federal public service had grown by 20%, or 36,000 jobs, under Labor. She questioned whether Australians felt better served by the government.
“You don’t grow the economy by growing the size of government. Every public sector job has to be paid for by a private sector worker,” Hume said.
The debate follows a pre-Christmas warning from the International Monetary Fund, which suggested that reducing government spending, including deferring public infrastructure projects, may be necessary to combat inflation. The RBA’s preferred inflation metric slowed to 3.5% in September 2024 but remains above its target of 2-3%, says the Sydney Morning Herald.
Australian Bureau of Statistics data revealed that 87% of employment growth from March 2023 to September 2024 occurred in non-market sectors—primarily education, healthcare, and public administration.
Pure public sector jobs made up 29% of the growth, with healthcare and social assistance seeing the largest boost, driven by the $49 billion National Disability Insurance Scheme, which employs over 300,000 full-time workers.
Proponents of the hiring increase argue that bolstering public services is essential for improving service delivery and reducing reliance on external consultants. The Community and Public Sector Union highlighted that investments in public sector staffing have led to faster processing times for public claims and enhanced services for citizens. Reserve Bank Governor Michele Bullock echoed this sentiment, emphasizing the importance of jobs in teaching, nursing, and aged care, says the Sydney Morning Herald.
However, critics like George Washington University economics professor Steven Hamilton argue that the expansion of public sector jobs is "strangling" private sector growth. He suggested that greater restraint in government hiring could have led to lower interest rates, stimulating private-sector activity and employment.
AMP chief economist Shane Oliver similarly argued in the article that the government’s focus on job creation has come at the expense of inflation control, suggesting spending cuts may be necessary to balance the economy.
Deloitte Access Economics partner Stephen Smith offered a more balanced view, noting that government spending must remain sustainable while also addressing the weak growth in the private sector. He emphasized the need for measures to support productivity growth in both market and non-market sectors, including incentives for business investment, says the Sydney Morning Herald.
At a press conference last week, Treasurer Jim Chalmers defended the Albanese government’s job creation record, citing 1.1 million jobs added under its leadership.
“We’ve shown that we can make substantial and sustained progress on inflation while creating jobs, not sacrificing them,” he said.