Treasurer Jim Chalmers denies Government has spending problem after Liberals identify $57 billion black hole

Treasurer Jim Chalmers today denied Labor has a spending problem after new calculations showed a $57 billion Budget black hole that will leave the government in deficit for at least the next decade.

The Federal Government went on the defensive after a new Opposition analysis, verified by independent economist Chris Richardson, showed payments to the states and other unexplained expenses weren’t accounted for in Treasury’s pre-election Budget outlook before the election in May that returned Labor to power.

The analysis was published in The Australian Financial Review on Wednesday ahead of data showing inflation soared to 3.8 per cent at the end of last year.

With economists at Australia’s big four banks universally predicting a rate hike on Tuesday next week, Dr Chalmers argued government spending was not driving up inflation.

“If our Budget was the problem, if public spending was the problem, then we wouldn’t have seen three interest rate cuts last year and the big moderation that we saw in inflation,” he told reporters in Brisbane.

The Treasurer argued a pull back in government spending is creating room for the private sector.

“In fact the main story in our economy in 2025 was that public demand was retreating, making room for a recovery in the private sector,” he told Sky News in a later interview.

“That’s one of the most important things that happened over the course of the last year or so. If you look at the contribution from public demand, that was shrinking.”

While government spending has been falling compared with private sector activity, AMP chief economist Shane Oliver said public final demand was at 28.5 per cent of the economy, covering state spending on infrastructure to Commonwealth NDIS and defence commitments and grants to the states and territories.

“Government spending is at a very high level - it remains at a record level,” he told The Nightly. “It’s still growing and it’s not contracting.”

Treasury’s Mid-Year Economic and Fiscal Outlook, released in December, showed a Budget deficit of $36.8 billion for this financial year, which was smaller than the $42.1 billion forecast in the pre-election March Budget.

Shadow treasurer Ted O’Brien and the Opposition’s finance spokesman, James Paterson, noted $57 billion in extra government spending wasn’t clearly outlined in this Treasury update or by the Parliamentary Budget Office.

“Since the election, a near-$60-billion hole has opened up in the medium-term forecasts and nobody can explain why. Not the Treasurer. Not Treasury. Not the budget watchdogs,” they said in a statement.

“It is bad enough that the Treasurer has added nearly $60 billion to the nation’s credit card. What makes it worse is his failure to be upfront with the Australian people about the real state of the Budget.”

Mr Richardson said treasurers had been able to manipulate the public by shifting expenses off-Budget.

“Because our budget rules and reporting are poor, they offer loopholes in which politicians can hide stuff,” he said. “Budget analysis focuses on the next few years, and so politicians also shove costs immediately beyond that time horizon.”

The Budget forward estimates cover the four financial years to 2028-29.

Government payments during the last financial year made up 26.2 per cent of gross domestic product. This is expected to climb to 27 per cent of GDP this financial year, which would be the highest since 1986, outside of the pandemic.

Payments to the states and territories are expected to total more than $200 billion in 2025-26, making up more than a quarter of the $786.6 billion in projected Federal Government spending.

Former Labor treasurer Paul Keating reduced government spending in the late 1980s, from 27.3 per cent of GDP in 1985-86 to 22.9 per cent in 1989-90 by cutting grants to the states and welfare benefits as Australia faced a terms of trade crisis, where export prices were weak compared with imports.