Where does the federal government’s money come from?
Each May, the federal Budget is a huge talking point as Australians tune in to find out where billions will be allocated. But have you ever wondered: where does the federal government’s money actually come from?
In 2025, Australia’s federal budget was just over $730 billion. That’s a staggering figure and it raises a few questions: Are taxpayers supplying most of that money? And can the government really just print money when it needs to?
To help unpack these questions, we spoke with Deakin University’s Three Minute Thesis (3MT®) winner, Matthew Crocker, a PhD candidate exploring the history of money in Australia. Here’s what you need to know.
The history of money in Australia
Prior to the arrival of the British, there is no evidence that Indigenous Australians used anything that resembled a currency. They traded goods, but it wasn’t until the British introduced signed pieces of paper as currency that the stage was set for the emergence of a monetary system.
The first bank in Australia was established in 1817, but it wasn’t until the discovery of gold in the early 1850s that banking really took off. However, it took until 1910 for the first wholly Australian currency to be introduced.
From 1910 to 1966 Australian money (currency) was the ‘Australian Pound’, before moving to the Australian dollar, which remains in use today. Australia’s move to a decimal currency aligned Australia with global trade partners and made calculations easier.
The next major change in Australia’s economy came with internet banking in 1995. Remember when people would line up at ATMs? The introduction of mobile banking in 2008 changed that forever.
More recently, Apple Pay and similar platforms allowed people to pay directly through their smart devices, like the iPhone and the Apple Watch.
Australia’s currency has constantly evolved – but history is just the backdrop to a bigger question: where does money itself come from?
Meet Matthew Crocker, Deakin 2025 3MT winner
Matthew Crocker, PhD candidate in the Faculty of Business and Law, won Deakin University’s 2025 Three Minute Thesis for his presentation on how the Australian Government creates money.
Where does new money come from?
For those of us who aren’t economists, it’s easy to conflate money and currency. But Crocker points out that there’s an important distinction.
‘A common trap when discussing economics is that terms such as “money” and “currency” are used interchangeably, but in fact there are some important differences between them,’ he says.
According to Crocker, banks are the source of most new money in any economy.
‘If your bank determines you are a trustworthy borrower and agrees to lend you $100, your bank will create $100 of new money out of thin air by crediting your bank account by $100, which is on the liability side of the bank’s balance sheet.’
To balance the books, the bank will record your promise to repay, plus interest, as an asset. In other words, your loan creates new money the moment it’s approved.
How is Australian money made and produced?
If banks create most new money through lending, then who makes the physical stuff – the notes and coins in our hands?
Crocker explains that the Royal Australian Mint produces Australian coins and Note Printing Australia produces Australian bank notes. Both are created on behalf of the Australian Government, but it is the Reserve Bank of Australia (RBA) that creates most of Australia’s currency today.
This currency (also known as Exchange Settlement reserves) the digital equivalent of physical currency and banks use it to settle payments to one another. ‘Importantly, only the Australian Government, or the RBA acting as an agent of the government, can create currency,’ he says.
But producing more notes and coins doesn’t mean there’s suddenly more money in the economy, Crocker explains.
‘The quantity of currency in the economy does not change unless the federal government spends or the RBA purchases an asset, but the composition of it can,’ says Crocker. 'For example, a bank may choose to convert one of its Exchange Settlement reserves into an equivalent value of Australian coins. There are now more coins in the economy than digital currency, but the total volume of currency has not changed.’
This process might spark a bigger question: if the government can create currency at will, where does the federal government’s money come from and how it is managed?
Understanding money and money supply
Banks, just like people, have bank accounts – only theirs are with the RBA, and the balance of the account represents the quantity of digital currency they hold.
‘Banks need Exchange Settlement reserves so they can settle payments to one another,’ says Crocker. ‘For instance, if I bank with ANZ and you bank at Westpac and I owe you $100, to settle the payment between my bank account at ANZ and your bank account at Westpac, ANZ’s Exchange Settlement Account (ESA) will be debited by $100 and Westpac’s ESA will be credited by $100.’
In short, ESAs are like the banks’ version of everyday accounts – a digital currency system that allows them to pay each other. Most banks across the world operate in this way and understanding ESAs gives us a clearer view of where the federal government’s money comes from in practice.
Importantly, only the Australian Government, or the RBA acting as an agent of the government, can create currency.
Deakin PhD candidate
Watch our interview with Matt Crocker about government spending
Join Crocker as he explores the key economic systems behind government spending, taxation, and financial decision-making in Australia.
How does government spending actually work?
If the federal government wants to build something or put money behind something, they can just do it, can’t they? But where do they get the money for these new projects or campaigns?
The short answer? It creates it. Or more precisely, the RBA creates it.
Where does the Australian Government’s money come from?
When taxes are paid to the Australian Government, the money ultimately ends up crediting the federal government’s account at the RBA – the Official Public Account (OPA). It’d be reasonable to think that this increases the government’s capacity to spend money, but that overlooks the federal government’s unique constitutional power to create currency.
The federal government spends money by instructing the RBA to debit the OPA and credit the bank account of whoever it wants to pay.
As Crocker explains, ‘There’s a signed agreement between the RBA and the government that sets out that the RBA will always execute the government’s spending, irrespective of the balance of the OPA. The implication is that the government does not need to collect taxes or borrow before it is capable of spending.’
Why doesn’t unlimited spending cause inflation?
The risk of inflation isn’t about whether the government collects taxes or borrows first – it comes down to the real resources available in the economy. As Crocker points out, ‘it’s the availability of real resources (e.g. labour, know-how, building materials) which matters. If the government’s spending competes with the private sector’s demand for these real resources then, yes, inflation may occur.’
What role do taxes and borrowing play?
Crocker explains that although taxes and federal government borrowing may credit the government’s bank account, we shouldn’t think of them as funding the government’s spending. Instead, taxes take money out of the economy, freeing up real resources for the federal government to purchase and thus combat any inflationary pressures.
As for why the federal government borrows money, Crocker suggests we should think of this as offsetting the government’s spending. When the federal government spends money, it increases the supply of currency, which, as pointed out above, may create inflation. When the government sells debt (i.e. borrows), it takes currency out of the economy. Crocker explains that another reason the government chooses to sell Treasury Bonds is to supply a risk-free asset for investors.
Where should the money be spent?
The real debate, of course, isn’t just about where the money comes from; it’s about where it gets spent. Should it go to schools and hospitals or defence and infrastructure? Everyone has an opinion – which is why budgets are one of the most hotly contested parts of politics and a constant focus during election campaigns.
But Crocker hopes that by teaching everyday Australians that for the federal government, it’s not about finding the money but rather ensuring its spending doesn’t contribute to inflation that public policy debate in Australia will be improved.
Ready to explore your research potential? Matthew Crocker’s 3MT® success shows the impact Deakin researchers can have.
