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Monster of debt to come

By Mikayla Novak - posted Monday, 6 April 2009

The spirit of Fabius Maximus seems to have taken hold of Kevin Rudd, who thinks that the way to economic salvation is to have a bigger government in every nook and cranny of our lives.

The conventional way to measure the size of government is to look at the share of spending as a share of gross domestic product. In the lead-up to the previous federal election, commonwealth expenditure was 24 per cent of GDP. The spending share stayed that way until the middle of last year.

But take a look at the latest budget estimates and the Treasury's economic growth projections, and a different and worrying picture emerges.


The Rudd Government's policy decisions are projected to spur a jump in general government size to 28 per cent of GDP this financial year, rising to 29 per cent by 2011-12.

As disturbing as the spending momentum looks on paper, a shortcoming with this indicator is that it is susceptible to changes in national output over time. Another, and arguably more effective, measure is to look at the Government's projected spending growth.

During the Howard-Costello era, expenditure rose by an average of 5.8 per cent a year. This was a considerably lower rate of spending growth than the 8 per cent of its Hawke-Keating predecessor.

When the Rudd Government came on the scene in November 2007, the trend towards slowing spending growth was sharply reversed. Despite promising to take the meat-axe to the public sector, the Government increased spending in its first year by 6.8 per cent. This is projected to increase to 7.3 per cent by 2011-12.

When taking into account expected inflation and population growth, the Rudd spending growth forecasts are equally dramatic. Under the Howard-Costello government, real per capita spending grew by 1.9 per cent. In its efforts to break off Australia's supposed neo-liberal shackles, the Rudd Government will increase spending on a real per capita basis to 4.1 per cent in four years.

These estimates are conservative, as they do not take into account future asset acquisitions by the Government or the multibillion-dollar black holes of tax expenditures and other off-budget boondoggles. Since the previous budget, the Government has racked up almost $1 trillion, or close to 100 per cent of GDP, in contingent liabilities based on deposits, loans and state borrowing guarantees.


In other words, we have a bigger government monster on our hands than even the official figures reveal.

Simple spending measures also do not fully reflect the impact of prescriptive regulations on the economy.

With labour market re-regulation, new controls over the financial sector and a "turn off the lights" greenhouse gas emissions scheme, we know that the Government is looking to aggressively expand the scope of its activities.

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First published in The Australian on March 31, 2009.

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About the Author

Mikayla Novak is a Research Fellow with the Institute of Public Affairs. She has previously worked for Commonwealth and State public sector agencies, including the Commonwealth Treasury and Productivity Commission. Mikayla was also previously advisor to the Queensland Chamber of Commerce and Industry. Her opinion pieces have been published in The Australian, Australian Financial Review, The Age, and The Courier-Mail, on issues ranging from state public finances to social services reform.

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