Budget blowout as Labor face $7.4 billion public service wages black hole

Treasurer Jim Chalmers has defended the Budget process, after media reporting revealed the Government could face a $7.4 billion blowout because it had not put aside enough money for rising public sector wages.

Budget analysis by the Australian Financial Review found that despite having agreed to a pay deal for 185,000 public servants, the rapid rise in wages will plateau from mid-2025 and annual salary costs projected to stay flat at $30 billion until at least 2028.

The forecast for almost no growth in those three years goes against the Government’s efforts to rely more on the public service at it looks to reduce external contracts; and is contrary to the latest enterprise bargaining agreement which will give mandarins an 11.2 per cent pay rise over three years to March 2026.

But Dr Chalmers said the budget reflects the “best current estimates” available for departmental expenses, and that departments were required to meet the wage increases from “within their existing allocated resources”.

“That’s been standard practice for some time now, and that departmental funding is subject to regular indexation,” he told ABC Radio.

He then turned to attacking the Coalition, who he said wanted to “slash a whole bunch of jobs that will cost more and deliver less”.

“It could herald a return to the days of robodebt. We saw how badly the mismanaged the public service,” he said.

Shadow treasurer Angus Taylor told Channel 7 on Wednesday a Coalition Government would rein in the public service and public spending.

“Over $100 billion of spending we’ve opposed in this term of Parliament, including adding 36,000 new Canberra-based public servants. We don’t think now is the right time to be doing that,” he said.

Finance Minister Katy Gallagher, on a panel with Mr Taylor, said that was “simply not true”.

“It is true, Katy. And worse than that, we’ve learned today that you haven’t even included the increase in salaries that you’ve negotiated in the budget,” she said.

“So, look the truth of the matter is this is a Government that has lost control of its spending.”

Independent economist Chris Richardson told the AFR the budget forecasts the Government had included in its mid-year economic outlook, released in December, “rarely pan out” and the Government would likely need to cut the headcount to meet the commitment of raising wages.

“They are looking for truly heroic restraint to start immediately after the election. Either we get a lot less staff, or wage growth doesn’t seem to line up with the EBA,” Mr Richardson told the AFR.

The federal public service wages bill increased 11.7 per cent in 2023-24 – the second-highest rate of growth this century – due to wage rises and about 15,000 new employees. Treasury projects that wage cost will rise another 10.8 per cent this financial year, which would be the third-highest outcome.

To achieve its projected savings on public sector wages, the Government effectively assumes the recent near-record rates of salary growth will plummet to near-record low rates from the middle of this year.

Treasury even projects that wages will fall 1 per cent in 2026-27. The only time the public service wages bill fell this century was in 2014-15, when then Coalition prime minister Tony Abbott pledged to cut 16,500 public sector jobs.

Any moves to cut public sector headcount would be fiercely resisted by Labor’s membership, the public sector and the union movement. It would also heap significant political pressure on Finance Minister Katy Gallagher, who is the Minister for the Public Service and represents the public sector-dominated Australian Capital Territory in the Senate.