"Today's national accounts data shows that while the private sector has turned a corner, the economy still relies on life support from the taxpayer," said Innes Willox, Chief Executive of the national employer association, Australian Industry Group.
Australian real GDP growth rose to 1.8% p.a. in the second quarter of 2025, driven by a pickup in private sector activity. However, indicators of output, public spending, investment and employment all reveal that the government-supported parts of the economy continue to outpace the private sector.
"This data shows that the much-needed 'handover' from the public to private sector as our primary engine of growth has yet to properly occur. Output and employment growth remains dependent on taxpayer support, without which our economic performance would be much worse," Mr Willox said.
"It is far too soon to declare 'mission accomplished' in returning the private sector to durable growth conditions.
"Reliance on the taxpayer poses hard questions for budget sustainability. The tax take has edged back from its peak last year while government spending continues to power ahead.
"This leaves the Federal and most state budgets with a mounting structural deficit problem that governments around the country are yet to properly confront.
"Meanwhile, a continuing slowdown in investment growth, and yet another quarter of risible productivity performance, should be cause for concern.
"Australia's economy cannot expect to escape this trap while businesses pull back from investment and productivity slides sideways.
"The Treasurer's recent Economic Reform Roundtable canvassed many ideas – some immediate wins, some medium-term reforms – to turn this performance around. Today's GDP data shows the great urgency in implementing these ideas and more," Mr Willox said.
Taxpayer still driving output growth
The economy continues to rely on the non-market sector as an engine of growth. Output increased 1.8% p.a. in the market sector (ex-mining) over the last year, growth in the non-market sector continued to outpace at 3.5% p.a. Growth in the non-market industries – education, public administration and healthcare & social – is significantly driven by government spending rather than market conditions.
This continues a pattern of government-supported industries outpacing the private market sector which has been in place for over a year. It reveals the much-anticipated 'handover' from the public to private sector as an engine of growth has yet to fully occur.
Government spending continues to grow
Public final demand – a measure of the economic impact of government spending – continued to climb, rising 3.0% p.a. over the last year. This was much faster than the 1.9% p.a. increase from private economic activity. High growth in government-supported non-market industries was the driver of this increase.
While the government share of the economy eased marginally – from 28.0% to 27.9% in the June quarter – it still remains at record levels. Prior to the pandemic, the government share had historically been between 21% and 24% since the mid-1980s.
Private sector investment slowdown continues
Overall investment in the economy was flat across the last year, growing only 0.2% in real terms. This was primarily driven by a -2.7% p.a. fall in mining investment. However, non-mining private investment grew at 1.0% p.a. in the June quarter - its worst quarterly result since the pandemic, and well below the pre-pandemic average of 2.7% p.a.
This continuing slowdown in investment levels augurs poorly for the durability of a private sector economic recovery. Investment is a leading indicator which points to future output growth.
Slow private sector points to labour market weakening
The Australian labour market continues to weaken, with growth in hours worked dropping from 2.3% p.a. to 1.6% p.a. in the June quarter. The slowdown would have been more severe in the absence of government support, with non-market sectors growing labour use by 3.5% p.a. while market sectors only added 0.9% p.a.
The resilience of Australia's labour market since the pandemic has depended on the taxpayer, with 82% of the jobs created in 2023 and 2024 being in government-supported sectors. This pattern is not sustainable in the medium term, but no signs of a much-needed handover to the private sector are yet in evidence.
Australia's productivity crisis continues
Labour productivity in the Australian economy grew by 0.1% p.a. in the June quarter. This is the first quarter in a year when the annual rate of productivity growth has increased rather than decreased. However, it remains significantly below both Australia's historical productivity growth rate (1.0% p.a.), and the RBA's most recent estimate of the economy's underlying productivity potential (0.7% p.a.)
The continued reliance on government support was a key factor behind low productivity growth, with the non-market sector seeing productivity decline again in annual terms (-0.1% p.a.) for the eleventh quarter in a row. However, market sector productivity growth of 0.3% p.a. was also very weak.
Given the continuing slide in private investment growth, it is unlikely a material turnaround in productivity is imminent. Investment levels need to rise before productivity can sustainably return to its potential level.
Tax burden eases slightly
The total tax burden in the Australia economy fell to 29.2% of GDP in the June quarter, down from its historical peak of 30.0% a year ago. The 1.3% p.a. increase in tax receipts in the quarter was lower than GDP growth for the first time since the pandemic.
This slowdown in tax revenue growth reflects changes to income tax arrangements made in the last two federal budgets. But with these now mostly worked through, bracket creep is likely to see tax revenues rise again unless further tax reform is undertaken.
