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Public sector announcement: we’re growing

Q: What is equal to one fifth of the economy and rarely celebrated?

A: Australia’s public sector.

It may not be sexy but it’s important. 

After headcount freezes, wage caps and efficiency dividends through the 2012 to 2015 years the public sector has again become a contributor to growth.

"After headcount freezes, wage caps and efficiency dividends… the public sector has again become a contributor to growth.” - Cherelle Murphy Underlying public demand grew by 5.4 per cent in year-average terms in 2016, offsetting some of the weakness from slowing mining investment. 

This change, albeit not advertised as a fiscal expansion by governments keen to retain their credit ratings, has been important given record low interest rates have done little to lift private sector activity outside of housing. Governments have quietly been using their spending power to add stimulus.

One of the strongest areas of public spending growth has been federal non-defence consumption. In the four quarters to March 2017, it rose to a record of 6.2 per cent of GDP.

That figure includes public servant costs, consultants, and purchases of goods and services. It also includes strong growth in the Pharmaceutical Benefit Scheme, but not welfare payments or grants.

Private sector employment is around 6.5 times larger than the public sector, but growth has been just 2.5 per cent over the last two years, compared to 12.4 per cent growth in the public sector.

In all states and territories except SA and NT public sector employment growth was stronger than in the private sector between May 2015 and May 2017.

Public sector wages growth, while falling, has also been stronger than in the private sector.

Supportive

ANZ expects the public sector to remain supportive, with the annual contribution to economic growth over the current year and next likely to be 0.7 percentage points or higher, back in line with its long-term average.

ANZ’s view has been informed by 2017-18 Federal and State budgets, including the NSW and SA updates released this week.

A reasonable - although imperfect - proxy of Government consumption from the state and federal budgets is recurrent expenditure and the sum of the latest budget figures shows expected growth of around 4 per cent to 4.5 per cent in 2016-17 and 5 per cent in 2017-18.

Using purchase of non-financial assets as a proxy for government investment suggests solid growth of over 15 per cent in the current and next financial year.

We see the risks to our 0.7ppt contribution forecast to the upside. A number of State Government elections in 2018 are more likely to boost, rather than cause a pull-back in, spending.

Voters in South Australia, Victoria, Queensland and Tasmania will go the polls and a federal election is also possible.

We also consider there to be upside risks to the forecasts because the nature of current spending in transport infrastructure could easily lead to unexpected cost increases, as we have seen with the NBN rollout.

This message comes with a health warning: it is not desirable for government spending to push the public sector to an historically large share of GDP. Governments must keep their powder dry for external shocks and they must retain the confidence of investors about their ability to repay debt.

This means government debt shouldn’t get too large or threaten the sovereign’s or semi-sovereigns’ credit rating.  An overly obtrusive government sector also risks crowding out private sector activity.

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Cherelle Murphy is senior economist

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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