Market Update: Rise of Australia’s public economy is comparable to the mining boom of the 2000s, analyst says – Full Analysis

You can’t say the Albanese government didn’t warn us. 

Three years ago, after its 2022 election win, the government drew attention to some huge structural shifts that were hitting Australia’s economy. 

In its first major budget, it dedicated an entire section to talk about them: “Structural shifts shaping the economy.”

“The Australian economy is changing in profound ways, with implications for society, policy, and public finances,” it warned.

“While there are many structural shifts shaping our economy, this statement focuses on three, common across many advanced economies: the growing care and support economy; our expanding use of data and digital technology; and climate change and the net-zero transformation.”

The government was signalling that its policies would be adapted to those long-term trends.

Fast forward three years, and what do we see?

Australia’s care economy (childcare, aged care, disability care, etc) is expanding significantly to meet the needs of our population, and that has big implications for measured “productivity” and our public finances.

The global AI-race has become so intense that water-hungry and energy-hungry data centres are a new form of currency, in the ruthless war for data dominance, and it’s sparking legitimate fears about the reality of the western surveillance state and Silicon Valley’s techno-feudalism.

And the problems posed by climate change and the net-zero transformation are clear.

Should we pretend these things aren’t happening?

Long-term trends, short-term spikes in inflation

That’s why it was refreshing to see Westpac senior economist Pat Bustamante circulate a note on Friday that reminded everyone that long-term structural shifts have gravitational forces that are hard to escape.

In case you missed it, in recent weeks, there has been a heated debate in the daily news cycle about the return of inflation in Australia and the Albanese government’s spending choices.

Economists and politicians have been arguing about public and private spending, and how public and private demand contribute to aggregate demand, the output gap, and inflation.

But some participants in the debate appear to have amnesia about the government’s warning (from three years ago) that big structural shifts would dominate our economy in the coming years.

Those structural shifts are part of today’s inflation story, too.

Thankfully, Bustamante has reminded us that long-term trends are much bigger forces than any short-term spike in inflation.

“Australia is undergoing one of the largest structural changes in modern history, comparable in scale to the mining investment boom of the 2000s,” he pointed out.

“Public spending now generates a record 35 per cent of domestic output, around 7 percentage points higher than a decade ago, and is linked to nearly 40 per cent of total employment.

“This shift is not inherently negative. However, it carries important macro implications.”

What’s he talking about?

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As big as the mining boom

Bustamante says a big expansion in public spending started in Australia a decade ago, it accelerated sharply during the pandemic, and persistently elevated public spending on expanded government programs since then has pushed the public footprint even higher.

See the chart below.

He says that increase in public spending means a greater share of the economy’s resources is being directed toward the provision of public services, and a huge labour market reallocation has taken place that is “substantially larger” than occurred during the mining investment boom.

“Reflecting this expansion, public spending has generated an estimated 2.3 million additional jobs over the past decade, around 40 per cent of which are in market sectors,” he says.

“Around 1.3 million of these jobs are attributable to the increased public share of economic activity, with the remainder driven by population growth.

“The breadth of these effects highlights that public spending influences labour market outcomes well beyond the non-market sector, with important implications for capacity, skills demand and wage dynamics.”

See the impact on employment in the chart below.

He says the growth in public spending is also contributing to capacity constraints in sectors such as construction, health, education, and rental and real estate services.

He says with less spare capacity available, those sectors have a reduced ability to accommodate an upswing in private demand without generating upward pressure on prices and wages.

“This is consistent with the persistence of inflationary pressures in housing related costs, construction inputs, and health services,” he says about our current problem with inflation.

A broader conversation, deeper understanding

Now, Bustamante says the infrastructure pipeline in Australia appears to have peaked at a high level, and that may mean that the public share of construction output will gradually decline.

He says as we saw in the mining investment boom in the early 2000s, the resulting capital deepening that will result from that surge in infrastructure spending should support higher productivity levels for our economy.

But he says the large increase in employment in the care economy will weigh on labour productivity for a time, given how labour-intensive the childcare, aged care, and disability care sectors are.

He says he also thinks the expansion in public spending will probably peak in the next 12 months (roughly), although he says that forecast could be wrong.

But overall, his analysis helps to put things into better perspective.

The big expansion in public spending in Australia started a decade ago, and it has accelerated since then. It may be peaking soon. It is connected to some huge structural shifts in the economy, but it is also contributing to capacity constraints.

At the same time, the RBA has been trying to keep unemployment as low as possible without contributing to inflationary pressures, but it admits that it’s a risky strategy that may be making the economy more susceptible to demand-side shocks at the moment (and more inflation-prone).

How much can we blame the Albanese government’s spending choices for the pick-up in inflation in the second half of 2025?

This is not to say that it can’t be blamed.

But a good discussion about today’s inflation would reference some of those big long-term economic trends that are grinding away in the background, which are changing the structure of the economy, alongside the daily inflation politics.