Liberal Party leader Sussan Ley claims too many of us are too dependent on government. But where is the evidence, with government income support in Australia being more tightly targeted than in any other country?

The Liberal Party has been tearing itself apart over whether and how to respond to climate change. So last week, Ley tried to unify her Party by talking instead about what should be the Liberal’s future economic philosophy and strategy.

In this, her first major economic speech as Opposition Leader, Ley declared that Australians are too dependent on welfare and government subsidies.

According to Ley, “We must move from a time of dependency on government to empowerment. By ‘dependency’ I mean the growing expectation that government will provide for every need and solve every problem by spending more.

“Unfortunately, in the past few years, the pendulum has swung too far toward dependency. My message is that we must put guard rails around government spending, not as an end in itself, but so we can strengthen our economy, preserve our capacity to help those truly in need, and ensure the next generation inherits opportunity, not debt”.

In sum, Ley’s philosophical message is that public expenditure is too high, because too many of us are too dependent on government support. Of course, she expects that this message will appeal in principle to many voters, but where is the evidence to support this assertion and what are the opportunities for expenditure cuts?

These are the critical questions that Ley has so far failed to address. The only indication she offered of where spending cuts might be possible was her assertion that there should be tighter targeting of government assistance, while on the other hand she downplayed the prospect of health or education cuts.

But realistically, what are the opportunities for reducing government spending and how significant are they? These are the questions that need to be asked and will be addressed below.

Is Labor’s spending excessive?

When we compare the growth rate of total government spending during the four years of Labor Government, with the previous nine years of Coalition Governments, there is very little difference.

Thus, between 2021-22 and 2025-26 the annual average rate of growth in Australian Government spending under Labor was 6.0%. This is not much more than the average growth rate of 5.6% achieved by the Coalition Governments between 2012-13 and 2021-22 (see Table 1).

Also, when the real rates of growth for Australian Government expenditure are compared for the Coalition and Labor, it is likely that real expenditure growth was less under Labor. According to the ABS, the price deflator for national government expenditure averaged only 2.0% during the nine years of Coalition Government while it increased at an average annual rate of 4.2% during the first four years of Labor; with at least part of the reason for the higher rate of cost increases under Labor being the restoration of public sector wage rates in areas such as health, education and care.

Table 1. The growth rate of Australian Government expenses

Average annual growth rate %

 Source: Treasury Budget Papers No.1

Finally, when we compare the different governments’ spending by function, again there is not a lot of difference in the respective rates of growth. The two exceptions identified in Table 1 have been:

• general public services where Labor has made economies, including by saving on consultants, and
• public debt interest, which is substantially higher under Labor, but this mainly reflects the higher interest rates in recent years, and not higher Australian Government debt which represented 22.1% of GDP in 2021-22, the Coalition’s last year in office, and is projected by the Treasury to be a little less at 21.5% of GDP in 2025-26 under Labor.

Where might savings come from?

As already noted, Ley has effectively ruled out seeking savings in health and education. Indeed, it is arguable that both are underfunded. Waiting lists for hospitals and for GPs are often too long, and excessive gap payments mean that too many people are foregoing necessary healthcare.

Equity in schools funding will not be achieved for another decade, if then. And universities are clearly struggling with lower government funding in real terms than before the Coalition took office back in 2013.

It is unlikely that a Coalition Government will cut Defence spending, and it will not be able to cut public debt interest payments or revenue assistance to the States which mainly represents their entitlement to the GST revenues.

So, realistically, the only potential opportunities for significant savings in Australian Government expenditure are the spending on social security and welfare and the other expenses not specifically identified in Table 1 above.

However, while these other expenses cover a wide range of government responsibilities, they only add up to 13% of total Australian Government spending, so even significant cuts would not realise major savings.

That leaves social security and welfare which a Coalition Government under Ley would have to rely on to significantly reduce spending. And in fairness, Ley did say that we should “Stop subsidising the comfortable off”.

But any such savings would require more means testing, and Australia already has the tightest means testing among all developed economies. This conclusion is supported by OECD data showing that Australia had the most progressive distribution of cash benefits in the OECD.

In the 2010s, Australia was spending 12 times as much on the poorest 20% of the population as on the richest 20%, a ratio close to six times the OECD average. Moreover, Australia had the most target-efficient benefit system, with each dollar of spending reducing inequality by about 75% more than the OECD average, and fewer dollars were spent.

Of course, those findings relate to the mid-2010s, but those means tests are still there, and what are the opportunities for more means testing or have they effectively all been taken up already?

Finally, in this connection it is also interesting to note that as a result of the introduction of superannuation by the Keating Labor Government back in 1992, the proportion of people of age-pension age who receive an age pension has dropped from about 80% in 2010 to under 70% in 2023-24 and is projected by Treasury to fall to about 55% in 2063-64.

This is a substantial budget saving compared to the typical European country where earnings-related retirement pensions are financed from government revenue.

Childcare

In some of the discussion following Ley’s speech, it has been suggested that the Coalition could walk back from Labor’s ambition to move to universal free childcare. That would offer some limited savings, but hardly enough to make a significant budget impact, and its impact on the labour market is likely to raise concerns.

Already, a combination of income tax rates and the means testing of family benefits means the typical family can face quite high effective marginal tax rates even without means-testing childcare assistance. And if childcare assistance is subject to tighter means tests, then the effective marginal tax rate for many women would be as high as 80% or more.

Further, many of these mothers work part-time and have considerable discretion about how many hours they work. It should therefore be expected that tighter means-testing of childcare may well lead to lower workforce participation and have a negative effect on household incomes and the economy.

In sum, it is surprising that the Liberal leader is contemplating increasing means-tests without any consideration of how that will increase effective marginal tax rates and the consequent negative impacts on families and the economy.

Conclusion

The reality is that the extent of tight expenditure targeting is higher in Australia than in any other developed economy. This is why the latest available data show that total government outlays by all levels of Australian government represented only 39.1% of GDP in 2024. Even the US was not lower (39.3%), while government spending in other similar countries was higher, such as Canada (44.7%), UK (46.3%) and the Euro area (49.6%).

In addition, government debt in Australia is lower than in all other countries to which we typically compare ourselves. For example, in 2024 general government gross financial liabilities in the US were as much as 122.9% of US GDP, more than double the comparable figure of 57.1% for Australia.

Instead of chasing totally unrealistic budget savings, Australian economic debate should, therefore, focus on how to raise more revenue to finance the future demands on the budget. A carbon tax would be the best place to start, and it would raise considerable extra revenue as well as helping to reduce carbon emissions.

The views expressed in this article may or may not reflect those of Pearls and Irritations.