Following Labor’s election win, NAB has predicted that the public sector debt burden will continue to rise as the government’s role expands and global dynamics shift.

NAB has predicted that the government’s share of economic activity will increase over the next three years as Labor’s secure position in parliament allows it to execute its agenda with more ease.

“We have transitioned from a multi-decade economic and political regime based on free trade and free markets to one where the role of government is bigger and broader than was the case in the prior regime,” NAB wrote in an economic update on Monday.

In 2024, Australia’s government spending was 26.5 per cent of GDP, data from Trading Economics showed. This was lower than the pandemic peaks of 31.4 per cent and 27.8 per cent respectively in 2021 and 2020, but higher than the 1971–2024 average of 24.5 per cent of GDP.

NAB predicted that the RBA would take the government’s announced spending plans as the ‘base case’ for Australia’s fiscal policy going forward, indicating a higher level of expected public spending for the foreseeable future.

Data from the Australian Bureau of Statistics (ABS) showed that government debt reached 31.7 per cent of GDP in 2023–24. RBA predictions have indicated that the government’s budget balance would be in deficit until 2028–29 at least.

Public spending has supported GDP growth throughout 2024, boosting growth by 0.3 percentage points in the December 2024 quarter, ABS data showed.

While Labor said its fiscal position was $1 billion stronger than it was in the 2025 Pre-election Economic and Fiscal Outlook, credit rating agency S&P Global warned that the government’s growing investment in ‘off-budget’ spending items had obscured its true fiscal position.

“The ‘AAA’ rating on Australia may be at risk if election promises result in larger, structural deficits, and debt and interest expenses rising more than we expect,” S&P analysts Anthony Walker and Martin Foo warned.

Despite this rebuke, analysts have noted that Australia’s AAA credit rating was not in immediate danger. The Reserve Bank said Labor’s 2025–26 budget had not materially altered its outlook for public demand in its April monetary policy meeting.

“Australia losing its AAA credit rating is unlikely as deficit and debt projections look little different from those in the March Budget,” Shane Oliver, chief economist for AMP, said.

Regardless, he slammed the government’s increasing use of ‘off-budget’ funds and labelled it a “mockery of budget transparency.”

Oliver also warned that record government spending could lead to higher inflation and interest rates, especially if commodity prices weakened.

“Structural spending pressures around the NDIS, health, aged care, defence and public debt interest are now taking the budget back into deficit when public debt is already high. They need to be checked and offset by savings,” Oliver said.

Regardless, inflation’s return to the Reserve Bank’s 2–3 per cent target bands in the March quarter of 2025 has prompted economists to predict broader rate relief throughout 2025, including a 25-basis-point cut in May, which would take the cash rate to 3.85 per cent.

NAB warned that current monetary policy settings were too restrictive, given the downside risks to Australia’s economy related to domestic growth and its labour market.

“If the RBA knew on 1 April what it knows today, it is likely that the Board would have decided to lower the cash rate by 25bp at the last meeting and followed that easing up with a 25bp rate cut in May,” NAB economists said.

As US tariffs create global growth headwinds, NAB cut its 2025 GDP forecast by 25 basis points to 2 per cent, and lifted its forecast peak of unemployment from 4.2 per cent to 4.4 per cent.

Furthermore, the flat retail sales result for the first three months of 2025 highlighted a more subdued spending pattern than seen in the last quarter of 2024, where spending was buoyed by sales deals such as Black Friday and Cyber Monday.

The RBA anticipated that consumption growth would pick up again in 2025, but warned that economic activity and inflation could slow more than expected if its consumption forecasts were overly optimistic.

The ABS’ Monthly Household Spending Indicator was below expectations on Tuesday, recording a 0.3 per cent fall over the month when economists were expecting a 0.2 per cent rise, My Bui, economist at AMP, said.

“Last week’s tepid retail sales data and today’s lack of growth in the Household Spending Indicator point to some stagnation in the consumer sector. It is likely that the recovery in spending will be very gradual as households are still impacted by high levels of prices,” Bui said.

“Today’s data makes it more likely for the RBA to resume its cutting cycle in May and potentially adds to the argument for more rate cuts later this year.”