There has been a spate of articles and commentary in recent days calling on the Australian government to reduce spending.

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Those calling for government cuts - mostly long-time advocates of smaller government - claim this would lower inflation, and as a consequence reduce interest rates.

In fact, claims that government spending is now a very large share of the economy are exaggerated.

So, what's actually going on with government spending?

Federal government spending has fluctuated between 23 per cent and 27 per cent of the economy (gross domestic product or GDP) since the mid-1970s. The exception was a spike during the COVID pandemic. Its current level is not particularly unusual.

The latest Reserve Bank forecasts estimate that "public demand" (spending by all governments, federal, state and local) expanded by 2.2 per cent during the course of 2025. This was less than the growth in consumer spending (3.1 per cent), home building (5.5 per cent) and business investment (2.5 per cent).

Nor has increased government spending on services led to a wage explosion in the public sector, which was a significant contributor to inflation in the 1970s.

Both public and private sector wages have been growing around an average of 3.5 per cent in recent years.

Michele Bullock, the Reserve Bank governor, does not try to direct the government on fiscal policy. Likewise, the government does not tell her what to do with interest rates.

The RBA prides itself on independence. Bullock is an independent agent and a direct speaker. If she thought government spending was the main force driving up inflation, she would say so.

Asked directly at her........

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