The spending ratchet and the size of government

Denise processes payroll for a mid-sized auto-parts manufacturer in Geelong, Victoria — about 140 staff, most on hourly rates, some carrying shift and weekend loadings. Twice a month she runs the same routine: calculate gross pay, withhold PAYG income tax, remit the superannuation guarantee, and lodge the return that tells the Australian Taxation Office how much of her colleagues' wages the Commonwealth has collected before the money ever reaches their accounts. Nobody on the factory floor thinks much about that withholding column. Denise does, because she has watched it climb, pay run after pay run, faster than the wage rises that are meant to be compensating people for years of a cost-of-living squeeze.

She has reasons of her own not to resent it. Her father, 81, moved into residential aged care in 2024, and the wage increase the Commonwealth funded for his carers is the reason the home still has enough staff on the floor to answer a call bell inside ten minutes. Her younger brother has an intellectual disability and has used the National Disability Insurance Scheme since it reached their part of regional Victoria; without it, he would not have the supported job he goes to three days a week. Denise's payroll ledger and her family's life sit on either side of the same line — the tax she processes out of other people's pay packets, and the government spending that keeps her own family upright. This topic is not about whether either side of that line is worth having. It is about whether the country ever actually decided, in the open, that it wanted a federal government permanently this much larger than the one it had before the pandemic — or whether it arrived there through a hundred separate, individually reasonable decisions that nobody added up and put to a vote.

What the government did: five decisions, one direction

Every advanced economy's government grew sharply through COVID-19. Border closures, wage subsidies such as JobKeeper, public health orders and one-off stimulus pushed Australian Commonwealth payments to somewhere in the order of 31 to 32 per cent of gross domestic product (GDP) in 2020-21 (approx.) — a level with no peacetime precedent (Budget Paper No. 1 and Final Budget Outcome 2020-21, approx.). Nobody serious disputes that this was an emergency response, and nobody expected it to be permanent. The question this topic asks is what happened once the emergency measures expired — and the government's own budget papers, read alongside Treasury's 2023 Intergenerational Report, answer it plainly: payments fell a long way from the pandemic peak, but they settled on a new floor well above where they sat before 2020, and every published projection since has that floor rising further, not falling back (Budget Paper No. 1, Statement 3 and Statement 6, various editions, 2022–2025; The Treasury, Intergenerational Report 2023, August 2023).

In the decade before COVID-19, Commonwealth payments ran at somewhere close to 24 to 25 per cent of GDP (approx.), and Treasury's own long-run reference point — an average calculated across roughly thirty years of budgets — sits at around 24.8 per cent of GDP (approx.) (Budget Paper No. 1, Statement 3, various editions, 2023–2025, approx.). By the 2024-25 and 2025-26 budgets, payments were forecast to run above 26 per cent of GDP across the four-year forward estimates (approx.), and the Intergenerational Report's own forty-year projection, published in August 2023, has payments climbing further still — to somewhere in the order of 28.8 per cent of GDP by 2062-63 (approx.) (Treasury, Intergenerational Report 2023, August 2023, approx.). That is not a forecast of a temporary bulge working its way out of the system. It is a projection, made by the government's own Treasury on the government's own economic and demographic assumptions, of a structurally bigger Commonwealth.

The Intergenerational Report names the reason directly. It identifies five categories of Commonwealth payments it expects to keep growing faster than the economy across the next four decades: health, aged care, the National Disability Insurance Scheme (NDIS), defence, and interest payments on Commonwealth debt (Treasury, Intergenerational Report 2023, August 2023). None of the five is new. Medicare dates to 1984; aged-care funding has grown with the population for decades; the NDIS was legislated in 2013 under a different government; defence spending has ebbed and flowed with the strategic environment for a century. What changed after 2022 is that the Albanese government made specific, identifiable decisions inside every one of the five — and each decision added to spending. None reduced it.

The NDIS was the subject of a National Cabinet agreement in April 2023 to moderate its growth to a target of 8 per cent a year by 2026, following an independent review — but that is a target to slow growth, not reverse it, and the scheme's cost base keeps rising even as the growth rate bends (National Cabinet communiqué, April 2023; NDIS Review, final report, December 2023, approx.). Aged care received a Fair Work Commission-ordered increase to award wages for direct-care workers of around 15 per cent (approx.), phased in from 2023 and funded in full by the Commonwealth, plus a new Aged Care Act passed by Parliament in 2024 that restructured funding without shrinking the system's overall cost trajectory (Fair Work Commission, Aged Care Work Value Case decision, 2022–2023, approx.; Aged Care Act 2024, Commonwealth of Australia). Health spending rose with a tripling of the Medicare bulk-billing incentive for GPs from November 2023 — the largest single increase in the incentive's history — layered on rising public hospital funding under the National Health Reform Agreement (Budget Paper No. 2, May-2023 and May-2024, approx.; National Health Reform Agreement addendum, 2023–2024). Defence spending was put on a higher trajectory by the Defence Strategic Review, delivered in April 2023, which recommended and secured additional funding rising toward at least $50 billion (approx.) across the decade to 2033, on top of the nuclear-powered submarine program under AUKUS, whose own cost the government put at between $268 billion and $368 billion (approx.) over three decades when it announced the pathway in March 2023 (Defence Strategic Review, April 2023; Australian Government AUKUS announcement, March 2023, approx.). And interest payments rose mechanically, as the larger debt stock built up through the pandemic met a Reserve Bank cash rate that climbed from 0.10 per cent in April 2022 to 4.35 per cent by November 2023 — the fastest tightening cycle in a generation (Reserve Bank of Australia, cash rate target series, 2022–2023).

Each of those five decisions, considered on its own, was defensible, and several drew support across the political spectrum. Taken together, and layered onto a payments base the pandemic had already lifted, they are the specific, traceable mechanism behind the structurally larger government the budget papers and the Intergenerational Report both describe. That is the case this topic has to weigh: not whether any one of the five was wrong, but whether their sum is a choice the country has actually made, or a total nobody has yet been asked to sign off on.

The evidence: five lines growing faster than the economy that funds them

The clearest way to test whether Australia's government is now structurally larger, rather than simply recovering from a temporary shock, is to compare how fast the big five payment categories are growing against how fast the economy that has to fund them is growing. If spending on health, aged care, the NDIS, defence and interest each grows in line with nominal GDP — the size of the economy measured in today's dollars, capturing both real growth and inflation — then the size of government relative to the country stays roughly constant, even as every dollar figure gets larger every year. If those five categories consistently outgrow nominal GDP, the government becomes structurally larger every year, independent of what happens in any single budget. Reading Budget Paper No. 1's payments tables against the Intergenerational Report's own long-run projections answers that question, and on the record so far, it is not close.

Measured by their combined weight rather than any single category's size, the significance of the big five becomes clearer still. Health, aged care, the NDIS, defence and interest already account for a large and rising share of total Commonwealth payments, and the Intergenerational Report's central projection has that combined share continuing to rise across the full forty-year horizon, even as most other categories of spending — where growth is assumed to track the economy more closely — hold roughly steady as a proportion of the total (Treasury, Intergenerational Report 2023, August 2023, approx.). In practice, that means the great majority of the net growth in the size of government projected over the next four decades is concentrated in these five lines. If the ratchet is ever going to be controlled, the arithmetic says it has to be controlled somewhere inside this list — there is no sixth, faster-shrinking category of spending large enough to offset it.

The NDIS: the fastest grower, now under an explicit brake

The NDIS is the newest of the five pressures and, on a percentage basis, has grown the fastest. Scheme costs ran at somewhere in the order of $40 billion or more a year (approx.) by the mid-2020s, on a trajectory budget papers and the Parliamentary Budget Office have both flagged as heading past $50 billion a year within a few years absent reform (approx.) (Budget Paper No. 2, various editions; Parliamentary Budget Office, NDIS costing and fiscal risk analysis, 2023–2024, approx.). Before the 2023 reforms, annual growth in the scheme's cost had at times run well into double digits in percentage terms (approx.) — a rate that, left unmoderated, would have seen the NDIS alone add more to Commonwealth payments in some years than most other programs add in a decade. The 8 per cent growth target agreed at National Cabinet in April 2023 is a genuine attempt to bend that curve, but 8 per cent a year is still comfortably faster than nominal GDP has grown across most of this period, meaning the scheme is targeted to keep outgrowing the economy — just more slowly than before (National Cabinet communiqué, April 2023; NDIS Review, final report, December 2023, approx.).

Aged care: a wage bill and a demographic wave arriving together

Aged care combines two separate cost drivers that happen to be moving in the same direction at once. The first is the workforce: the Fair Work Commission's Aged Care Work Value Case found the sector's award wages did not reflect the value of the work, and its decision — phased in from 2023 and funded by the Commonwealth — lifted direct-care wages by around 15 per cent (approx.), a permanent addition to the cost of every hour of care delivered from that point on (Fair Work Commission, Aged Care Work Value Case decision, 2022–2023, approx.). The second is demand: the number of Australians aged 85 and over — the cohort that uses residential aged care most intensively — is projected to keep rising for decades as the large cohorts born in the postwar years move through their eighties and nineties (Australian Bureau of Statistics, population projections, various releases, approx.; Treasury, Intergenerational Report 2023, August 2023). Neither driver eases on its own; a wage rise does not reverse, and the demographic wave does not recede until well past mid-century.

Health: steadier growth, still above the size of the economy

Health spending is the least dramatic of the five in year-to-year terms, but the Intergenerational Report projects it to keep rising as a share of GDP across the full forty-year horizon, driven by the same ageing population pushing up aged-care costs, alongside the rising cost of new medicines and medical technology (Treasury, Intergenerational Report 2023, August 2023, approx.). The bulk-billing incentive alone — tripled from November 2023 at a cost budget papers put in the low billions of dollars over the following years (approx.) — was a deliberate, welcome decision to reverse a slide in GP access, and this site's companion audit on Medicare examines it on its own terms. For the size-of-government question, what matters is that it is one more addition layered onto a health budget already projected to grow faster than the economy before the incentive was even announced.

Defence: the newest pressure, and the one still ramping up

Of the five, defence spending has the least budget history to draw on, because the decisions that will drive most of its growth were only taken from 2023. The Defence Strategic Review's core finding — that the ten-year strategic warning time Australian defence planning had assumed since the 1980s no longer applied — is reflected in funding that rises toward at least $50 billion (approx.) in additional spending across the decade to 2033, before the AUKUS submarine program's own cost, put at between $268 billion and $368 billion (approx.) over thirty years, is even added in (Defence Strategic Review, April 2023; Australian Government AUKUS announcement, March 2023, approx.). Most of that spending sits in the outer years of the budget's forward estimates and beyond, in the medium-term projections rather than the here-and-now — which means defence is the pressure furthest from its peak. On the government's own trajectory, its share of Commonwealth payments and of GDP is set to keep climbing well into the 2030s, not level off.

Interest: the fastest-growing line nobody voted for

Interest payments on Commonwealth debt are, in one sense, not a policy decision at all — they are the mechanical price of debt already issued, set by the interest rate the market demands rather than by anything a minister announces in a budget speech. But they are also, on the numbers, one of the fastest-growing categories in percentage terms across the medium term, because two forces compounded at once: the debt stock built up through the pandemic response was already larger than anything Australia had carried outside wartime, and the interest rate applying to new and refinanced debt rose sharply as the Reserve Bank lifted the cash rate from 0.10 per cent to 4.35 per cent between April 2022 and November 2023 (Reserve Bank of Australia, cash rate target series, 2022–2023; Budget Paper No. 1, Statement 3, payments tables, various editions, 2023–2025, approx.). Budget papers and independent commentary, including from the Parliamentary Budget Office, have flagged interest as one of the fastest-growing major payments over the medium term specifically because it is compounding off a larger base at a higher rate than at any point in at least a decade (Parliamentary Budget Office, fiscal risk and interest cost analysis, 2023–2024, approx.).

Read against Australia's own fiscal history and against its peers, the scale of the shift is more significant, not less. The last comparable structural increase in the size of Australian government followed the Global Financial Crisis, when stimulus spending lifted payments before they were gradually wound back over the following several years toward something close to the pre-crisis trend (Budget Paper No. 1, historical fiscal data, various editions, approx.). The post-COVID trajectory has not repeated that pattern: the return-to-trend phase that followed 2008-09 has not happened this time, on any of the government's own published projections. Internationally, Australia has historically run a smaller government, measured as total spending against GDP, than most other advanced economies — a position budget papers and successive treasurers of both parties have cited as a comparative advantage (OECD General Government total outlays comparisons, various years, approx.). A payments share climbing from the mid-24s toward the high 20s does not close that gap, but it narrows it, moving Australia's fiscal starting point closer to the OECD average from a position that used to be a genuine outlier on the smaller side.

Five pressures, one government, and not one honest number ever put to voters: this is how much bigger we are asking you to let us become.

The critique: a ratchet only turns one way

Budget economists have a name for the pattern Australia's post-COVID payments trajectory follows: the ratchet effect. Government spending as a share of the economy tends to rise sharply during a shock — a war, a recession, a pandemic — and then fall back only part of the way once the shock passes, settling on a new, higher floor rather than returning to the pre-shock trend. Australia's own numbers fit the pattern closely. Payments fell a long way from the 2020-21 peak of around 31 to 32 per cent of GDP (approx.), but they did not fall back to the pre-COVID range of 24 to 25 per cent (approx.); they settled above 26 per cent and, on Treasury's own forty-year projection, are set to rise again from there (Budget Paper No. 1, Statement 3, various editions, 2022–2025; Treasury, Intergenerational Report 2023, August 2023, approx.). A ratchet, by definition, only turns one way.

The revenue side of the ledger makes the ratchet harder to fund, not easier, because the piece of the economy that is supposed to grow the tax base fast enough to carry a bigger government has itself gone backwards. Labour productivity — how much the economy produces for each hour worked, examined in full in a companion audit on this site — fell back toward levels of several years earlier over the same period the five spending pressures accelerated (ABS National Accounts, productivity statistics, various releases, approx.). A government can carry faster-growing spending commitments if the economy underneath them is also growing faster — a "productivity dividend" that lets revenue rise without raising tax rates. Australia has had the opposite: spending pressures accelerating at the same time productivity growth stalled. Without that dividend, the arithmetic that closes the gap has only three moving parts — raise taxes, borrow more, or grow some other part of spending more slowly — and none of the big five categories is a plausible candidate for the third option.

What has actually filled the gap so far is the least visible and least deliberate of the three. Bracket creep — inflation pushing wage earners into higher tax brackets without those brackets being indexed, examined in detail in a companion audit on this site — has done a large share of the quiet work of funding the ratchet, because it raises revenue without a minister ever having to legislate a rate rise or defend it at an election (Parliamentary Budget Office, personal income tax projections, 2023–2024, approx.). A deliberate, explicit decision to fund a permanently larger government would involve a specific new tax, a specific spending cut elsewhere, or a specific, defended increase in the size of the deficit the country is comfortable running indefinitely. Bracket creep is none of those things — it is a default setting that raises the average tax rate automatically, every year, on ordinary wage earners, without ever appearing on a ballot paper as a choice.

The previous government's fiscal strategy included an explicit, numerical constraint on the other side of the ledger: a self-imposed cap holding tax receipts at or below 23.9 per cent of GDP (approx.), adopted from the 2018-19 Budget as a discipline meant to stop government growing larger without a corresponding decision to cut spending elsewhere (Budget Paper No. 1, Statement 3, 2018-19 to 2021-22 editions, approx.). The current government's fiscal strategy statements have not restated an equivalent tax-to-GDP ceiling with the same numerical specificity (Budget Paper No. 1, Statement 3, various editions, 2022–2025, approx.). Dropping a specific cap is not, on its own, evidence of bad faith — a rule set for a different economic environment does not necessarily fit the one Australia is in now — but it does mean one of the few explicit, checkable constraints that used to bound how large government could grow on the revenue side no longer applies in the same form, at precisely the point spending pressure is at its most persistent.

The two years of budget surplus in 2022-23 and 2023-24 — a genuine achievement examined on its own terms in a companion audit on this site — are the clearest illustration of the point. A commodity-and-employment windfall gave the government room to either close the structural gap between spending and revenue, or to lock in new permanent commitments on top of an already-elevated payments base. The record shows more of the latter than the former: across the same budgets that recorded two surpluses, the government legislated or funded the NDIS growth settlement, the aged-care wage rise, the tripled bulk-billing incentive and the first tranche of the Defence Strategic Review's funding path — new, ongoing commitments layered onto a payments base still running above its pre-COVID level (Budget Paper No. 1 and Budget Paper No. 2, various editions, 2022–2024). None of those decisions was reckless in isolation. But the cumulative effect was that a rare window of fiscal room was used to expand the size of government further, not to buy down the structural gap the same Treasury identified in the very same period.

No document, speech or election campaign has ever put the sum of the five pressures to the country as a single, explicit choice: "government will be permanently around three to four percentage points of GDP larger than it was before the pandemic, and here is how we will pay for it." Each pressure was debated, funded and legislated on its own terms, against its own, largely uncontested case. The size-of-government question the Intergenerational Report itself raises — whether Australia wants, and can afford, a Commonwealth this much bigger, indefinitely — has never been asked in those terms, let alone answered.

A government does not become structurally larger by deciding to; it becomes structurally larger by never deciding not to.

What the government got right — and the honest caveats

Credit is due in specific places. The NDIS growth target agreed at National Cabinet in April 2023 was the first time any government had put an explicit number on moderating the scheme's growth, following an independent review that took the scheme's sustainability seriously rather than treating any scrutiny of its cost as an attack on participants (NDIS Review, final report, December 2023, approx.). The Aged Care Act, and the funded wage rise that preceded it, responded directly to findings the Royal Commission into Aged Care Quality and Safety had already made about a workforce crisis under the previous government's watch — this was arguably overdue rather than discretionary. The Defence Strategic Review was a genuinely rigorous, externally authored process, not a blank cheque dressed up as strategy, and its recommendations were contestable and debated in public before funding followed. And the bulk-billing incentive addressed a real, measurable decline in GP access that had been building for years.

It is also fair, in keeping with this site's standard of separating what a government causes from what it inherits, to say plainly that the government did not create any of the five underlying pressures. The NDIS was legislated in 2013, under a Labor government but with cross-party support, nearly a decade before this government took office. Australia's ageing population is a demographic fact playing out over half a century, not a policy choice made after May 2022. The deterioration in the regional strategic environment that the Defence Strategic Review documented reflects shifts in the Indo-Pacific that no Australian government controls. And the debt whose interest bill is now compounding was overwhelmingly built up funding an emergency pandemic response that had near-universal public and political support at the time, including from the Coalition then in office. This government's responsibility is for the specific decisions it made inside each of the five pressures since 2022 — the moderation targets, the wage rises, the funding paths — not for the existence of the pressures themselves.

None of this is unique to Australia. Ageing-related spending pressure on health and aged care is projected to rise across almost every advanced economy over the coming decades, and a number of Australia's allies and partners have separately increased defence spending in response to the same deteriorating strategic environment the Defence Strategic Review describes (OECD and IMF long-term fiscal sustainability comparisons, various, approx.). An Australian government of either major party would likely be managing versions of at least four of these five pressures today — the NDIS is the exception, being a specifically Australian scheme with no direct overseas equivalent — which is a reasonable caveat against reading the ratchet purely as evidence of this government's fiscal indiscipline, rather than as a genuine, shared structural challenge facing most of the developed world.