Over the past year, Australia’s public sector has stepped more firmly into the economy, ramping up funding for childcare, healthcare, education and other core services to support families and workers. This shift follows years of cost-of-living stress and a push to widen access to essential care, especially for young children and older Australians. At the same time, the broader economy is still wrestling with capacity limits, sluggish productivity and an ageing population that demands more health and support services.
In practice, this means government now accounts for a larger share of total spending, with federal outlays at their highest non-pandemic level since the mid-1980s. Childcare is a standout example. Subsidies in this sector have run above $16 billion in a year, while mandated pay rises of around 15% for workers over two years have flowed through to higher fees. Official data show the cost of childcare jumping about 11% over the year, and prices for other government-shaped essentials such as health, education, transport and utilities are now rising faster than the overall inflation rate. Economists see this as evidence that public demand is competing with private businesses for scarce workers and resources, pushing up wages and input costs across the board.
The broader concern is that this two-track expansion, with strong public demand alongside a still-resilient private sector, seems to be stretching the economy beyond its speed limit. Labour markets illustrate the trade-off. Rapid hiring in health and other public-facing services appears to be drawing workers away from private employers, which makes it harder and more expensive for businesses to attract staff. With headline inflation at about 3.8%, above the Reserve Bank’s 2–3% target band, financial markets now largely expect a 0.25 percentage point rate rise at the central bank’s upcoming meeting. If that happens, higher interest rates would likely slow household spending and business investment, which could undermine a private-sector-led recovery even as government programs try to cushion households from rising costs.
