Is it really government spending that made the RBA hike?

Posted on February 6, 2026 by Pete Faulkner - Uncategorized

Since the RBA hiked the Cash Rate by 25bps on Tuesday there has been a lot of commentary (much of it unfortunately heavily politically slanted!) about whether it’s the government’s fault that inflation has stayed higher for longer than the RBA would like.

The RBA Governor has been extremely careful in her remarks to the press and MPs that the driver behind the Bank’s decision was that “aggregate demand” has been running hotter than expected and that aggregate supply hasn’t been keeping up; in other words the economy is growing faster than its current ‘speed limit’. That conclusion in itself is rather concerning given that the most recent GDP data for the third quarter showed growth at only 2.1%. Governor Bullock, when pressed to point the finger at ‘excessive government spending’ acknowledged that public sector spending is of course part of aggregate demand and therefore cannot be removed from the conversation about demand more generally growing above supply. What she has most certainly not done is to “confirm(s) Labor spending fuelled higher inflation” as The Australian tried to suggest today in response to Governor Bullock merely restating her point about government spending contributing to aggregate demand. Here’s the actual quote that The Australian (and many opposition MPs) seem to think was some kind of ‘gotcha’…

“Government spending is part of total spending and total aggregate demand in the economy, so it, along with private spending, contributes to aggregate demand. And so to the extent that aggregate demand is above aggregate supply, which we think it is, that’s contributing to inflation,”

To try and put some of this discussion in context we thought it might be helpful to spell out what makes up GDP and how fast each component is currently growing. Is there evidence that the excessive growth is coming primarily from the public sector?

Spoiler alert…No, there isn’t.

Components of GDP Q3 2025 s.a.
Component		% of GDP	y/y change%
Expenditure
	Federal Govt	11%	+4.8%
	State & Local	12%	+0.6%
	Total Public	23%	+2.6%
	Household	51%	+2.5%
	Total Exp	74%	+2.5%
Investment
	Private CAPEX	19%	+4.7%
	Public CAPEX	6%	-3.1%
	Total CAPEX	25%	+2.8%

Totals	Private	70%	+3.1%
	Public	29%	+1.4%

Net Exports		1%	-5.6%

GDP		100%	+2.1%

What we see from the table above is that;

Household expenditure is by far the largest component of aggregate demand dwarfing federal government spending by almost 5:1
Even the somewhat faster Federal expenditure growth (+4.8%) would have had only a limited impact on the pace of aggregate demand. For example, had Federal spending growth almost halved to be at the same pace as Household consumption (+2.5%) then GDP growth would have been 1.8%. The same result would come from Household consumption slowing only slightly to 2.0%.
When we consider Federal, State and Local expenditure together growth (+2.6%) is almost identical to private expenditure growth (+2.5%); and is still significantly less than one-half the size.
If we consider the Public sector more generally (and include both consumption and Capital Expenditure) then the story becomes even more stark. The Public Sector components of GDP grew at just 1.4% for the year while the Private Sector were +3.1%.