Article by Judith Sloan, courtesy of The Australian
02.02.2026
When Anthony Albanese was asked last week whether government spending was contributing to the uptick in inflation, he immediately rattled off a list of government handouts. He talked about cheaper medicine, Medicare bulkbilling, the guarantee of three days per week of subsidised childcare.
I wondered whether he had misheard the question, but the reality is that the Labor government thinks the solution to inflation is to go long on handouts. What he doesn’t seem to understand is that these handouts are part of the problem, not the solution.
They are contributing to the unsustainable growth in government spending which, in the context of inflexible supply in many parts of the economy, is simply adding to inflationary price pressures.
For a short time, Jim Chalmers thought he had discovered a new secret sauce. By introducing universal electricity rebates, he figured the headline rate of inflation would be lower – this is arithmetically correct – and the Reserve Bank would do the right thing by adjusting the cash rate based on this manipulated figure.
Alas, the good folk down at the bank see through this sort of thing and concentrate on the trimmed mean figure of the CPI. But think about if Chalmers had been correct, he should have doubled, tripled or even quadrupled the rebates. He would have slain the inflation dragon while allowing the bank to cut the cash rate. How good would that have been?
But here’s the thing: it has become increasingly clear that Chalmers simply doesn’t understand how the economy works. When confronted with the unwelcome CPI release last week, the Treasurer pulled out all the talking points given to him by Treasury and attempted to tell us that black is white.
Evidently, inflation is now all about the evil workings of the private sector. It has nothing to do with government spending. After all, the RBA managed to cut the cash rate three times last year. In any case, the governor of the bank doesn’t attribute blame to excess government spending, at least explicitly. (There are quotes around from the governor that put a different spin on this story.)
Chalmers also has some weird analysis about the components of the CPI increase – housing and childcare were big ticket items. But we are expected to believe that these changes have nothing to do with what the government has been up to.
The Treasurer is living on another planet if he thinks that the ramp-up in government spending is not making inflation worse. Just look at the figures. According to MYEFO, real government spending will increase by 4.5 per cent this financial year; it grew by 5.5 per cent last financial year. Government payments as percentage of GDP are close to 27 per cent, another record outside Covid and several years in the early 1980s.
His relocation to another planet is confirmed by his declaration that the budget is now in ‘better nick’. Someone should tell the Treasurer that no one cares about what was laid down in the 2022 Pre-election and fiscal outlook statement which was written at a time of great economic uncertainty. Comparisons with the Coalition government voted out in 2022 are also becoming extremely stale.
The reality is that the four-year cumulative underlying cash balance provided in the MYEFO at the end of last year was negative $143bn, while the more meaningful headline cash balance which takes into account off-budget spending was negative $237bn.
But if these figures are not frightening enough, it turns out Treasury has become increasingly inept at forecasting spending. For example, there has been a close to $60bn deterioration in the overall budget position since May 2025, overwhelmingly because of higher payments. There is now no expectation that the budget will return to surplus within a decade given the very significant underestimate in payments.
There is not a sensible economist anywhere who would describe these developments as being consistent with the description of the budget being in better nick. In fact, the fiscal picture is grim and worsening, with the government either unwilling or incapable of restricting the growth of payments. Recall here that government debt is now over one trillion dollars and growing rapidly.
Take the case of childcare. The cost of the childcare subsidies has now crept into the six fastest growing government payment items – interest is the fastest, followed by the NDIS. It is hardly surprising that the cost of childcare services has grown by over 20 per cent since 2022, and by over 10 per cent in the last year, according to the CPI print. This is what happens when demand is pumped through government subsidies and supply is slow to react.
It’s now clear that the government will struggle to rein in the annual growth of NDIS payments below 8 per cent, having failed to seal an immediate deal with the state governments to hive off a separate program for children with mild autism and developmental delays.
In any case, it’s hard to get too enthusiastic about this because establishing another program with another name doesn’t necessarily alter the amount of government resources being devoted to disability services, with all its waste and inefficiency.
The fact is that the Labor government has taken the wrong fork in the road by stepping away from means-testing of social spending. Only by means-testing is spending targeted at those who cannot afford the services. Recall that this was the principal means former Labor finance minister Peter Walsh used to get the budget into better nick. Mind you, he saw it as both an economic and moral imperative.
For reasons that are not entirely clear, although the changing demographics of Labor voters is part of the explanation, the Albanese government has been rapidly walking away from means-testing, with the slight exception of aged care.
Why do high income earners require bulk-billed GP services? Why do families with combined incomes of more than half a million dollars require subsidies for childcare? Why should those on high incomes not contribute to the disability services needed by them or their family?
The irony now is that consideration is being given to taxing people on high incomes more, including through the removal of economically justified concessions. It’s the classic case of robbing Peter to pay Paul, except it is actually robbing Peter to pay Peter.
With the prospect of several interest rate hikes this year, the government is peddling hard to sell the likely economic developments in a positive light. Add in the prospect of falling real wages – the growth has been very weak in any case – and it’s an unattractive picture. Were it not for the complete ineffectiveness of an opposition in tatters, the government might be on the ropes.
