Senate Economics Legislation Committee, , 45:48 to 52:27
The committee examines the 2025-27 deficit projections and the unexpected strength of private sector demand compared to public sector contributions to economic growth.
Topics: Government spending, Efficiency dividend
Speakers: Jenny Wilkinson, Hon Jane Hume, Senator Lisa Darmanin
All right. Um do you want to take another 10-minute block and then I'll rotate?
Yep, absolutely. I'm very happy to do that. Is the deficit this year bigger than last year?
Uh so Senator, the underlying so the the deficit for 25-26 in the final budget outcome did come in at came in at 22.3 billion, which is 0.8% of GDP. That was lower than we expected at budget, that was lower than we expected at my IFO, and it was lower than we expected in the previous updates. The deficit for 26-27 is uh 31.5 billion dollars, which is about one per cent of GDP.
So if we have a bigger deficit this year than last year, surely that is an indicator of an expansionary fiscal policy. If spending is higher now than it has been in 40 years, surely that is an indicator of an expansionary fiscal policy. And yes, even if public sector growth is lower than it was two or three years ago, it's not necessarily the growth that's the problem, it's the quantum, it's the amount, it's the proportion of growth in the economy that is the concern. Do we have an expansionary fiscal policy?
So, Senator, the government um, so so we're running a deficit of about one per cent of GDP. Um that is um uh a much lower deficit than in many countries, many, many countries around the world. Um I think the point that I'm trying to make is that when we're trying to understand what's contributing to uh the stronger growth that we've seen over this past year, where we've been surprised has not been in terms of there being uh a higher deficit, where we've been surprised is is we have been, I'm just telling you honestly, where we've been surprised has been on the on the private sector side. Private sector growth has been stronger than we expected, that's right.
So Ms. Hunter, who is the RBA assistant governor, said on 60 minutes just on Sunday night in response to a question about the role of government spending and driving inflation. She said government spending is definitely part of the picture. Do you agree with the RBA that government spending contributes to inflation repression?
So, Senator, so so that no one's denying that government spending contributes, well, is part of demand in the economy. No one's denying that. I mean that that's clearly the case.
So, all right, thank you. Now you're a member of the Reserve Bank Board, you would be furnished with the information on which the experts at the RBA Lightness Hunter used to form their views. That's correct, I'm assuming. You get the benefit of treasury information as well in your role as Treasury Secretary. Is there any conflict in the advice and the reviews that you are provided by the RBA as opposed to the Treasury?
So Senator, um absolutely, I'm a member of the Reserve Bank Board. I don't think it's appropriate for me to speak to the papers that I receive in the context of the RBA board briefings. I mean, these are I have to sign secrecy provisions.
Um not asking you to reveal any details.
No, so so Senator, the the discussions that we have around the macroeconomic outlook, um, to be honest, including the discussions that my offices have with RBA staff, um like there are times we have differences of views. Which I think is healthy, frankly, that we have differences of views about the outlook, but I don't think that there is any difference of view that if you look over the past 12 months, where we have been surprised in relation to activity, and I think the governor has said this, we have been surprised by the strength of private demand in the economy. And that's I mean, to be honest, that's a surprise. That's been a surprise that not just the government agencies, but but that's been something which has surprised most market economists. When I look back to, frankly, when I took this role in the middle of 2025, we were in an easing phase at the reserve bank. The outlook was for inflation to come back to target, the outlook was for growth to slow and and that's macroeconomic forecasting is hard, but that's just not what has turned out to occur. And when we look at why that has not turned out to occur, um what we the things that have been very different from what we had expected as I said, have been that the private sector level of activity has been stronger than we've expected. That's the predominant driver of this difference.
I'm sorry, Treasury Secretary. Are you telling me that that is the only thing that is driving inflation?
No, Senator, I'm definitely not saying you telling you that that's the only thing that's driving inflation. In fact, if I was to talk about what are all of the different things that are driving inflation, I mean one of the things that I would definitely point to is the is um again what was unexpected. Um in addition to what's happening in private demand, what's happened in the Middle East. I mean, the Middle East shock has been a shock that has uh affected inflation, as I said in my opening statement across uh almost all uh economies around the world. Um the increases in fuel uh costs, uh disruption to broader supply chains, all of that is putting an inflation pulse through the economy. That is definitely uh also contributing. Uh in fact, I would I mean it's it's making a very significant contribution uh to the uh increase in inflation that we are observing or we've observed over the past uh six months.