Government grows, growth slows
By David Hughes
First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.
Australia now has one of the largest public-sector workforces in the world on a per capita basis.
Four out of every five new jobs created over the past two years have been in the public sector, health and education. From 2022–23 to 2023–24, the number of public sector employees across all levels of government increased by almost 90,000. The NSW Government now even boasts of being the largest employer in the southern hemisphere.
As the chart from last week’s newsletter revealed, Australia leads the world with the highest share of workers in the public sector. We have used the same data to create the chart below to demonstrate the steady rise over the last two decades. When the last few years of data can be reconciled we could see close to 30% of Australians in taxpayer funded roles.
Source: International Labour Organisation, ABS
What’s driving the growth? A combination of political choices and expanding welfare obligations. As the AFR reported this week, a growing ‘culture of dependency’ has helped lift government spending to its highest level since World War II. More than half of all voters now rely on governments for their primary income — either through public sector jobs or government payments.
This surge raises serious questions about more than just fiscal sustainability. It also goes to the heart of Australia’s productivity problem. While public and community services are expanding rapidly, they are not doing so efficiently.
Economists distinguish between "market" and “non-market” sectors. Market sectors (like manufacturing, retail, and technology) compete for customers, invest in new tools, and are rewarded for being more productive. Non-market sectors (such as health, education, aged care, disability services and public administration) are predominantly government-funded and do not face the same incentives to improve efficiency. Their output is harder to measure, and their growth is shaped more by policy decisions than performance.
Non-market sectors have expanded nearly three times faster than the rest of the economy over the past two decades. McKinsey and others have found these areas have delivered zero productivity gains over that time, even as their size has ballooned.
In short: a growing share of the workforce is employed in sectors with weak productivity, and little competitive pressure to improve. And the consequences are real.
The Reserve Bank made clear this month that unless productivity improves, interest rates will remain higher for longer. Growth in low-productivity, government-funded sectors is one of the reasons monetary policy can’t ease more quickly.
This is the bind we’ve created: a shrinking share of workers in the sectors that drive innovation, investment and wage growth — and a swelling share in sectors that don’t.
None of this is to suggest public services don’t matter. But growth without efficiency is a recipe for stagnation.
A public sector that expands faster than the economy and without productivity gains, puts pressure on budgets, holds back private investment, and ultimately lowers living standards.
During election campaigns, battles are fought on who can commit the most taxpayer funds for vital services, like Health, Defence and the NDIS. This fuels our current predicament where inefficiencies and poor delivery of services are simply patched over with more money and staff. After that, there little time, money and willpower remaining to look at what policies could help the private sector. The private sector are not just being ignored, they are being crowded out.
Instead, the battle should be over who has the best plan do more with less. It can start with measuring outcomes, rewarding efficiency, and recognising that a strong economy depends on more than simply adding headcount to the public payroll.
