The Treasurer and Finance Minister are armed and getting serious about getting the country’s budget to a better place. Will they succeed?

The ‘one big beautiful’ aspect of Labor’s huge victory at the May poll and the Coalition’s current leadership turmoil is that the money mean members of the Government — Treasurer Jim Chalmers and Finance Minister Katy Gallagher — are getting serious about getting the country’s budget to a better place.

This comes as the AFR recently revealed that a hiring boom and big pay hikes for around 185,000 public servants is set to blow out the budget by $7.4 billion. Even more worrying is that “spending on federal public sector wages was $40.9 billion last financial year, an increase of 9.5 per cent, on top of a 10 per cent rise in 2023-24.”

Political cynics might argue that this was a lot of public sector vote buying!

Gallagher has told top public servants to find savings, that is, cuts to spending up to 5% to kill the big growth in public sector costs. To be fair, while our budget position is better than many comparable first world economies, there is a growing concern from the alarmist economic and investing experts, as well as influential commentators, that if a stock, bond or private credit market problem got out of hand, government bailouts would be harder to implement.

This is a consequence of the big government spending to rescue the world from a possible Covid-created Great Depression. This led to a sustained bout of high inflation and a surge in interest rates, which was then followed by a stock market rally powered by rate cuts, an AI boom (which many say is a bubble) and some of the unusual policies of President Donald Trump.

So, Gallagher’s demand for belt-tightening from public servants is sensible, especially as the Government has curried favour with its voters/constituency by being generous with tax cuts, wage rises and spending on social welfare and renewable energy projects.

Many of these above actions have kept unemployment levels low, which has been good for the budget’s bottom line, as long dole queues lead to government relief payments to the jobless and reduces tax collections.

However, it has kept inflation too high and curtailed expected rate cuts. So, cuts to the public service will not only reduce the budget’s deficit but also put downward pressure on inflation and rates.

Keeping the economy growing with lower inflation means the private sector should grow, which will offset any lower economic growth because the Government is spending less.

Here are the main points of the Gallagher plan to improve the budget:

1. Cabinet Ministers and top public servants have been asked to reveal how they could meet these cost cut targets.
2. These are on top of a mandatory ‘efficiency dividend of 1%’ that these people are supposed to find each year.
3. These potential savings will be on show in the May Budget next year.
4. Non-permanent contractors are currently being shown the door.
5. Departments are already reducing numbers via natural attrition and freezing of non-essential roles.
6. Voluntary redundancies are expected.

The AFR’s John Kehoe and Ronald Mizen gave examples of how Gallagher’s commands are already being followed: “Treasury plans to cut 250 jobs over two years, a 15 per cent head count reduction from its average staffing level of 1600 in 2024-25. The CSIRO announced last week it would shed up to 350 positions, in addition to more than 800 roles it has cut over the past two years.”

While these cutbacks are sensible, they should have been done in 2024. However, there was an election to be won. The problem of delaying these cuts, which won’t really happen until 2026, is that history says Wall Street’s worst time with a new US President is in the second year. And that’s next year!

Add this to current AI concerns and inflation (that’s not making interest rate cuts easy to deliver by central banks) and this could create a potential financial crisis that often needs government spending and rescuing to avoid big unemployment numbers and business failures.

The only one thing I hold on to that might make 2026 okay for investment markets is the fact that the US has an unusual President, who, via his financial deregulation promises and his One Big Beautiful Tax bill, might delay the day of reckoning that could get the Albanese Government’s financial house in order.

Before I go, remember this AFR-delivered fact: “The total public service workforce has grown about 38,200 since 2021 to 193,500, according to the Australian Public Service Commission.”